Creating a
world fit for
the future
Ricardo plc
Annual Report & Accounts 2018/19
Who we are
Ricardo is a global engineering, technical,
environmental and strategic consultancy
business. We also manufacture and assemble
low-volume, high-quality and high-
performance products and develop advanced
virtual engineering tools for conventional and
electrified powertrains as well as for complex
physical systems. Our ambition is to be the
world’s pre-eminent organisation focused
on the design, development and application
of solutions to meet the challenges within
the markets of Transport & Security, Energy,
and Scarce Natural Resources & Waste. Our
mission is to create a world fit for the future,
and we will achieve this through the activities
of our portfolio of businesses, each of
them underpinned by our talented team of
professionals.
Drawing on over 100 years of commitment to
innovation in engineering, technology and
business, Ricardo’s engineers, consultants,
scientists and support staff deliver class-
leading products and services for the
benefit of a broad and global client base
– a client base which includes the world’s
major transportation original equipment
manufacturers and operators, tier 1 suppliers,
energy companies and government agencies.
Ricardo cultivates the talent and the
engineering and scientific excellence
of its professionals and invests in their
development for the benefit of the individual,
for our organisation, and for our stakeholders.
At Ricardo, our diverse community is bound
together by a simple desire to develop
solutions to complex problems, and is driven
by our corporate values of Respect, Integrity,
Innovation, and Passion.
Contents
Group overview
1
4
5
6
Introduction to Ricardo
Order intake
Financial highlights
To create a world fit for the future
Strategic report
10
12
13
16
18
20
26
28
30
36
38
44
45
47
Chairman’s statement
Our strategy and strategic objectives
Chief Executive’s statement
Market overview
Strategic performance
Technical Consulting
Performance Products
Research and Development
Financial review
Our people
Corporate responsibility and sustainability
Risk management and internal control
Principal risks and uncertainties
Viability statement
Case studies
50
54
58
62
66
70
Smarter rail electrification
Supporting Australia’s circular economy
Helping NASA navigate ‘big data’
Reducing motion sickness in autonomous vehicles
Smart, urban, and every inch a BMW
Spark of inspiration for natural gas engines
Corporate governance
Board of Directors
76
Corporate governance statement
Nomination committee report
Audit committee report
Directors’ remuneration report
78
84
85
88
110 Directors’ report
113
Statement of Directors’ responsibilities
Financial statements
116
124
124
125
Independent auditors’ report
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated and parent company
statements of financial position
Consolidated and parent company
statements of changes in equity
Consolidated and parent company statements of cash flow
126
127
128 Notes to the financial statements
Additional information
176
Corporate information
177 Global emissions legislation
Energy saving service
proves its value
DriveSmart, Ricardo’s low-cost
energy-saving solution for rail
operators, marked its first year
in operation at Edinburgh Trams
by reporting an immediate 17%
reduction in energy usage.
Ricardo and UK Government
at IPCC in Kyoto
Ricardo Energy & Environment
supported the UK government at
the Intergovernmental Panel on
Climate Change in Kyoto, Japan
in May 2019, to refine greenhouse
gas inventory methodological
guidelines, facilitating the
implementation of reporting
structures under the Paris
Agreement.
Air Quality and
Climate Change
Smart energy management
Ricardo Energy & Environment has
signed an agreement to collaborate
with a joint venture between Tata
Power and local government, to
deliver innovation and improved
quality of service for energy
consumers in Delhi, India.
Defence technology for EVs
Following its deal to supply anti-
lock brake and electronic stability
control systems for the US military’s
HMMWV ‘Humvees’, Ricardo
Defense has been selected by
Bollinger to provide similar systems
for the world’s first all-electric sport
utility trucks.
Energy Security
and Sustainability
Digital resilience builds
traction in rail sector
Train manufacturer Bombardier
appointed the Ricardo-Roke
collaboration to integrate cyber
security assessments into the design
and testing of its Aventra model –
an important sign that managing
digital risk is an increasing priority
for major OEMs.
Connectivity and
Intelligent Devices
Group overview
Introduction to Ricardo
A selection of key projects from the year...
Helping NASA navigate
‘big data’
Ricardo Defense is providing NASA
with advanced software for the
analysis and optimisation of large
and complex data sets to facilitate
detailed planning for future deep-
space missions.
See case study on pages 58 to 61
Global
Stability
Natural Resource
Scarcity
Smarter rail electrification
Ricardo Rail is helping the
Netherlands provinces of Fryslân
and Groningen to explore affordable
electrification of an existing
low-traffic diesel-operated route
network using partial catenaries and
battery-equipped trains.
See case study page 50
At the centre of EU climate
planning
Ricardo Energy & Environment has
been assessing the National Energy
& Climate Plans being developed
by each EU Member State to ensure
that the EU achieves binding 2030
targets on energy efficiency and
greenhouse gas reductions.
The new BMW C 400 series
Ricardo Motorcycle partnered with
BMW to develop a new generation
of mid-sized scooters that distil
the qualities of BMW’s larger
maxi-scooters into a novel series of
smaller and more accessible urban
mobility models.
See case study page 66
Reducing motion sickness
in autonomous vehicles
Engineers in Ricardo Innovations
have been working to create a
software package that aims to
minimise the effects of motion
sickness in the passengers of both
autonomous and conventional
vehicles.
See case study page 62
Rapid
Urbanisation
At the heart of the UK Clean
Air Zones scheme
Ricardo Energy & Environment
provided support to UK cities in the
development of Clean Air Zones,
aimed at improving air quality for
urban populations.
Spark of inspiration for
natural gas engines
Ricardo Software is collaborating
with European research partners to
create tools to develop a new form
of compact natural gas engines
giving diesel-like power and
performance but with significantly
reduced CO2 and NOX.
See case study page 70
Supporting Australia’s
circular economy
Ricardo Energy & Environment has
been contracted to support the
New South Wales Environmental
Protection Agency (‘EPA’) in Australia
in the development of the state’s
circular economy strategy.
See case study on pages 54 to 57
Creating a world fit for the future 1
Delivering innovative waste
infrastructure in Abu Dhabi
Ricardo assessed the feasibility to
develop a series of facilities across
the region to convert waste into jet
fuel and chemicals, as a sustainable
product to support decarbonisation
of the industry and to ensure local
government meets waste diversion
targets.
Our people
Three thousand dedicated and talented people in our global team of experts
situated in key locations around the world.
3,000
people
88
nationalities
20
countries
51
sites
Consultants
Engineers Scientists
Where we are
United
Kingdom
North
America
Mainland
Europe
2 Ricardo plc Annual Report & Accounts 2018/19
China
Rest of Asia
Rest of
the World
Australia
Technical Centres
Offices
What we do
Technical Consulting
We provide engineering, technical, environmental and strategic consultancy
services to clients across a range of market sectors. We also provide accreditation
and independent assurance services to clients in the rail sector.
Environmental
consulting
Rail
consulting
Automotive
systems
Strategic
consulting
Independent
assurance
Performance Products
We manufacture and assemble high-quality prototypes and niche volumes of complex engine,
transmission and vehicle products. We also develop advanced virtual engineering tools such as
computer-aided engineering and simulation software for conventional and electrified powertrains,
as well as for complex physical systems.
Niche
manufacturing
Computer-aided
engineering
software
Simulation
software
Who we work with
Original
equipment
manufacturers
Tier 1
suppliers
Energy
companies
Government
agencies
Creating a world fit for the future 3
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Order intake
Order intake for FY 2018/19 of £386m (FY 2017/18: £413m) split by our:
Operating segments
Our businesses aggregate into two distinct reportable
operating segments:
Ricardo plc External Order Intake
Ricardo plc External Order Intake
Market sectors
Our strategy of diversification into adjacent market sectors has
continued to provide balance to our order intake:
Ricardo plc External Order Intake by Market Sector
Ricardo plc External Order Intake by Market Sector
Ricardo plc External Order Intake by Geography
Ricardo plc External Order Intake by Geography
Ricardo plc External Order Intake by Customer
Ricardo plc External Order Intake by Customer
FY 2018/19 (%)
FY 2017/18 (%)
32
2
22
78
1
68
Technical Consulting
Performance Products
Geographies
Our operations in selected market sectors span many
different regions of the world:
Ricardo plc External Order Intake
Ricardo plc External Order Intake
Ricardo plc External Order Intake by Market Sector
Ricardo plc External Order Intake by Market Sector
Ricardo plc External Order Intake by Geography
Ricardo plc External Order Intake by Geography
34
38
8
19
FY 2018/19 (%)
2
9
FY 2017/18 (%)
1
14
12
12
27
24
UK
Mainland Europe
North America
China
Rest of Asia
Rest of the World
4 Ricardo plc Annual Report & Accounts 2018/19
FY 2018/19 (%)
10
FY 2017/18 (%)
24
14
3
12
20
16
9
21
35
9
27
Automotive
Off-Highway & Commercial Vehicles
High-Performance Vehicles & Motorsport
Rail
Energy & Environment
Defence
Customers
Our order intake arises from a global customer list that
includes the world’s major transportation original equipment
manufacturers and operators, tier 1 suppliers, energy companies
and government agencies:
Ricardo plc External Order Intake by Customer
Ricardo plc External Order Intake by Customer
FY 2018/19 (%)
15
2
14
FY 2017/18 (%)
15
1
13
16
1
1
19
2
3
4
5
4
4
4
4
3
2
5
5
3
6
7
3
2
8
9
22
10
2
9
2
1
10
4
5
4
2
6
7
2
2
8
17
11
18
11
14
15
13
8
12
17
13
12
9
12
1-10. Top 10
11. UK
12. Mainland Europe
13. North America
14. Asia
15. Rest of the World
Financial highlights
Order intake(2)
-7%
Revenue
+2%
£m
FY
£m
FY
314
295(*)
248
231
140
2018/19
2017/18
2016/17
2015/16
2014/15
386
413
366
361
252
2018/19
2017/18
2016/17
2015/16
2014/15
£m
384.4
378.5(*)
352.1
332.4
257.5
Order book(1)
+6%
FY
2018/19
2017/18
2016/17
2015/16
2014/15
Underlying(3) profit
before tax
-1%
Underlying(3)(4) basic
earnings per share
-3%
Dividend per share
(paid and proposed)
+4%
FY
2018/19
2017/18
2016/17
2015/16
2014/15
£m
FY
pence
FY
37.0
37.5(*)
38.3
37.7
26.8
2018/19
2017/18
2016/17
2015/16
2014/15
53.7
55.1(*)
55.7
55.2
42.4
2018/19
2017/18
2016/17
2015/16
2014/15
pence
21.28
20.46
19.3
18.1
16.6
Statutory profit
before tax
-2%
Statutory basic
earnings per share
+12%
Net (debt)/funds
-82%
FY
2018/19
2017/18
2016/17
2015/16
2014/15
£m
FY
pence
FY
26.5
27.0(*)
32.2
33.0
22.9
2018/19
2017/18
2016/17
2015/16
2014/15
37.1
33.0(*)
46.8
48.6
35.6
(47.4)
(26.1)
(37.9)
(34.4)
2018/19
2017/18
2016/17
2015/16
2014/15
£m
14.3
Further detail is given in the Financial Review on pages 30 to 35.
(*) Financial information for FY 2017/18 has been restated for the transitional impact of adopting IFRS 15 Revenue from Contracts with Customers from 1 July 2018 and is presented on a like-for-like basis
with FY 2018/19. The impact of the restatement is set out in Note 38(a) to the financial statements on pages 170 and 171.
(1) Order book comprises the value of all unworked purchase orders and contracts received from customers at the reporting date and provides an indication of the amount of revenue that has been
secured and will be recognised in future accounting periods, as set out in Note 18 to the financial statements on page 150.
(2) Order intake comprises the value of all purchase orders and contracts received from customers in the period and provides an indication of the level of revenue-generating activity in the Group. Order
intake can be reconciled as closing order book (£314m) less opening order book (£295m(*)) and acquired order book (£30m), plus revenue (£384m) and order cancellations (£13m).
(3) Underlying measures exclude the impact on statutory measures of specific adjusting items as set out in Note 4 to the financial statements on page 139. Underlying measures are considered to
provide a more useful indication of underlying performance and trends over time and can be found, together with a reconciliation to equivalent statutory measures, on the income statement in the
financial statements on page 124.
(4) Underlying earnings also exclude the tax impact on statutory earnings of specific adjusting items as referred to in Footnote 3.
Creating a world fit for the future 5
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Our mission:
To create a world fit for the future
This year has seen a breakthrough in terms of awareness of the
risks of climate change: public pressure has intensified for more
ambitious action to reduce greenhouse gas emissions, and to
accelerate the implementation of climate policies in the UK
and elsewhere.
In October 2018 the UN’s Intergovernmental Panel on
Climate Change published a special report which, for the first
time, set out starkly the impacts of a rise in the Earth’s average
temperature above pre-industrial levels of more than 1.5°C. A
month later Swedish teenager Greta Thunberg began what
has become an international movement of school strikes for
climate change, followed by the Extinction Rebellion protests
which brought central
London to a standstill in
April 2019. In May, the UK’s
Committee on Climate
Change recommended that
Ricardo is here to provide
leadership for our clients
and to find solutions to
these challenges
the UK adopt a new long-term
emissions target of net zero
greenhouse gases by 2050, and
in June the UK became the
first G7 country to legislate for net zero emissions, effectively
eradicating its contribution to climate change by the middle of
this century. Other G7 countries are now planning to introduce
similar legislation within the next year.
For more than 30 years, technical experts in Ricardo Energy
& Environment have been supporting the UK Government
and a wide range of authorities in cities, regions and nations
around the world in their efforts to tackle dangerous climate
change, working with many private and public-sector
stakeholders along the way. Ricardo’s experts not only
contributed directly to the Committee on Climate Change’s
6 Ricardo plc Annual Report & Accounts 2018/19
To create a world fit for the future
Ricardo’s
Glasgow-based
environmental
consultants
supporting
a range of
activities
for the UK’s
National Clean
Air Day
Whether it is the electrification and automation of the
automotive sector, the demand for more efficient rail
transport, the safety of military
and emergency service
vehicles, addressing the issues
of a growing number of
megacities, creating innovative
software solutions and tools,
or indeed tackling the impact
of dangerous climate change,
Ricardo is here to provide
leadership for our clients and
to find solutions to these
challenges.
Creating a world fit for the future 7
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Ricardo supporting mangrove planting during
delivery of a capacity building workshop on climate
change commitments in Jakarta
net zero report: they have also been working with multiple
organisations, in the UK and overseas, to identify how to meet
more ambitious emissions reduction targets whilst maintaining
economic growth.
And this resonates throughout the wider Ricardo Group as
we work collaboratively across our 3,000 employees to address
the risks and opportunities emerging from parallel global
issues and megatrends that include rapid urbanisation, air
quality and climate change, energy security and sustainability,
connectivity and intelligent
devices, scarcity of natural
resources, and global stability.
These megatrends are
driving economic and social
change, promoting growth
in developing countries, and
of course harnessing and
encouraging the disruptive
technology which will be so
crucial in the uncertain world
of the future.
Ricardo Energy & Environment presenting on air quality at a
European Commission workshop
Strategic
report
8 Ricardo plc Annual Report & Accounts 2018/19
Connectivity and
Intelligent Devices
Energy Security
and Sustainability
Global
Stability
Natural Resource
Scarcity
Air Quality and
Climate Change
Rapid
Urbanisation
10 Chairman’s statement
12 Our strategy and strategic objectives
13 Chief Executive’s statement
16 Market overview
18 Strategic performance
20 Technical Consulting
26 Performance Products
28 Research and Development
30 Financial review
36 Our people
38 Corporate responsibility and sustainability
44 Risk management and internal control
45 Principal risks and uncertainties
47 Viability statement
Creating a world fit for the future 9
Sir Terry Morgan CBE – Chairman
Chairman’s statement
Ricardo’s continued diversification strategy has proved successful and enabled us to be
resilient to the continued turbulence in the global automotive market. On that note,
I would like to welcome into the Ricardo Group all employees of our two Australian
acquisitions, Transport Engineering and PLC Consulting.
Ricardo will continue to pursue diversification in its acquisitions and invest in its core
products and services to create a world fit for the future.
Results
For the year ended 30 June 2019, the Group delivered revenue
of £384.4m, together with profit before tax of £26.5m and
basic earnings per share of 37.1 pence. On an underlying basis,
profit before tax was £37.0m and basic earnings per share was
53.7 pence.
As set out in more detail in the Chief Executive’s Statement
on pages 13 to 15 and the Financial Review on pages 30 to
35, the Group delivered a resilient set of results. There was
a modest increase in revenue and underlying profit before
tax was broadly in line with the prior year. This was despite
challenging conditions in certain markets within our
Technical Consulting business, which resulted in mixed
performance across its divisions.
The results reflected the Group’s continued focus on its
strategic objectives of geographic and sector diversification
through carefully targeted acquisitions and disposals.
The acquisition of Australian rail consultancy, Transport
Engineering, was completed on 31 May 2019 and its June
results were in line with expectations. The Group completed
the acquisition of Australian environmental consultancy,
PLC Consulting, on 31 July 2019.
The Group’s performance against its strategic objectives is
outlined on pages 18 and 19. We also continued to invest in
10 Ricardo plc Annual Report & Accounts 2018/19
research and development, as described on pages 28 and 29,
and in our people and our facilities.
People
I would like to thank all of our employees for their hard work
and professionalism over the last year. As set out on pages
36 and 37, Ricardo is a people business and our employees
underpin everything that the Group achieves.
Notable achievements during the year have included
Ricardo Strategic Consulting being named by Forbes as one
of America’s leading management consultants, for the fourth
consecutive year – from among more than 50,000 firms active
within the US market.
In its second annual rating of the UK’s top management
consultancies, the Financial Times has again identified Ricardo
Energy & Environment as a leader in the area of Sustainability in
its listing of the UK’s Leading Management Consultants 2019.
Ricardo received the Sir Henry Royce Memorial Foundation
Award from The Worshipful Company of Carmen of London,
recognising Ricardo for ‘outstanding work in extending the
frontiers of achievement, and the pursuit of excellence, in the
field of transport worldwide.’
I would also like to congratulate all those other individuals and
team members who have won awards under the various Ricardo
recognition programmes during the year, together with those
members of staff who have gained academic success or peer-
group recognition in their chosen career paths.
Corporate governance
The Board firmly believes that robust corporate governance
and risk management are essential to maintain the stability of
the Group and its financial health. I am reporting separately on
Corporate Governance on pages 78 to 83 of this Annual Report.
I am delighted that the FTSE4Good Index Series has confirmed
Ricardo’s continued inclusion for demonstrating strong
Environmental, Social and Governance (‘ESG’) practices. This
continued achievement bears testament to our commitment to
the highest standards of corporate governance, which ultimately
produces a better business and supports long-term performance.
The Board
On 6 September 2019, we announced the retirement of Peter
Gilchrist CB from the Board following the close of this year’s
AGM. As a result, Ricardo has appointed two additional Non-
Executive Directors, Russell King and Jack Boyer OBE. At the
close of the AGM, Russell King will be appointed Chairman of
Chairman’s statement
the Remuneration Committee and Malin Persson will take on
the role of Senior Independent Director. I have decided to stand
down as Chairman of the Nomination Committee and Laurie
Bowen will be appointed to this role.
I would like to thank each of our Non-Executive Directors for
their counsel during the year.
Dividend
The dividend has grown each year on average by 7% over the
last decade. The Board has declared a final dividend of 15.28 pence
per share to give a total dividend of 21.28 pence, which is an
increase of 4% on the prior year. This is in line with the Board’s
policy to pay progressive dividends and reflects its continued
confidence in the prospects of the Group, whilst acknowledging
the uncertain economic climate.
Outlook
Ricardo’s strategy is underpinned by trends which will affect an
ever-increasing number of people around the globe: growing
populations, mass urbanisation, declining air quality, climate
change, more stringent emissions legislation and growing
scarcity of natural resources.
Despite the level of uncertainty in the political and economic
landscape, including the continued downturn in the global
automotive market, our diversified order book and the quality
of our global experts across all sectors gives Ricardo a good
platform for future growth.
Sir Terry Morgan CBE
Chairman
Ricardo’s Non-Executive Directors and Chief Operating Officer, Mark Garrett, visit Shaanxi
Fast Gear as part of a tour of Ricardo’s Chinese and Hong Kong operations and key customers
Creating a world fit for the future 11
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Our strategy
Our mission is to create a world fit for the future by being the world’s leading organisation for
engineering, technical and environmental consultancy within the markets of Transport & Security,
Energy, and Scarce Natural Resources & Waste.
Rapid Urbanisation
Air Quality and
Climate Change
Energy Security
and Sustainability
Connectivity and
Intelligent Devices
t
n
Policy
Global Engineering &
Environmental Consultancy
G o v e r n m e
y
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s
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I
Transport
& Security
Energy
Scarce Natural
Resources & Waste
Natural Resource Scarcity
Strategy | Advice | Assurance | Engineering | Product
Global Stability
Our People
Creating a world f it f o r t h e
e
f u t u r
Consulting
I
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Engineering
Product
See pages 13 and 14 for further information.
Our strategic objectives
1
Business
growth
2
Risk
mitigation
3
World-class
talent
4
Operational
excellence
5
Added value
for clients
Profitable growth
delivered by focusing
on future trends and
market demands
driven by client needs,
technology change
and prevailing or
impending policies and
regulation
Reducing risk through
the mitigation of
business cyclicality
and the avoidance of
external dependency,
whether geographic,
technical, industry
sector or client-related
Ensuring a working
environment that
attracts, develops and
motivates a diverse,
world-class team
and fosters industry
thought leadership
Maintenance of an
optimised cost base
through an efficient
global operation and
the development
of leading-edge
tools, processes and
capabilities to maximise
value from our
resources
Provision of in-
demand products
and services through
our commitment
to market-leading
research, development
and innovation aimed
at providing maximum
and enduring benefits
to our customers
See pages 18 and 19 for further information.
12 Ricardo plc Annual Report & Accounts 2018/19
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Dave Shemmans – Chief Executive Officer
Chief Executive’s statement
In this financial year, Ricardo managed to deliver an increase in revenue and order book overall, despite a
very turbulent backdrop in Automotive. This was driven by strong growth in Performance Products and
Energy & Environment in particular. We successfully expanded in Australia, with the acquisition of Transport
Engineering in May 2019 to support our Rail business, and PLC Consulting in July 2019 to broaden our
Environmental consulting offering. We continue to invest in technologies, services and digital products
to aid our blue-chip clients – together we create sustainable solutions to address the key issues of climate
change, air quality, global stability and the management of scarce natural resources.
We deliver services and products to help build a cleaner, safer and more sustainable world – in essence,
creating a world fit for the future. The demand for innovative solutions in the markets and geographies we
serve, together with our diverse portfolio of businesses, gives us confidence in Ricardo’s continued success.
Strategy
We strive to create a world fit for the future through the
exploitation of new technology, delivered by the very highest
quality professionals from around the globe – specialists who are
acknowledged experts in their fields. Our strategy is connected by
three core principles:
• Professionalism and technical excellence in everything that we do;
• Business growth underpinned by the enduring megatrends
of rapid urbanisation, climate change, demand for cleaner and
safer energy and transportation, digitalisation, global stability
and the management of scarce natural resources; and
• Business resilience through the organic and inorganic
development of a balanced portfolio of consultancy and
manufacturing businesses, serving different markets and
sharing common strategic, engineering and technical
competencies.
Our customers in all of the sectors in which we operate demand
innovative solutions to address the challenges of cleaner air, safer
energy, electrified, connected and autonomous transport and
the efficient use of natural resources.
Ricardo continues to develop and deliver leading-edge
services and products to support its clients all over the world
in their desire to address these global issues and help create
a cleaner and safer future. Our Technical Consulting and
Performance Products businesses share common competencies,
allowing Ricardo to assist clients in all phases of a project or
product life cycle, in parallel with building a portfolio of short-
and long-term programmes.
This year we have increased our focus on digitalisation and
cyber security. As digitalisation transforms businesses and
industries, it is our strategy to evolve our processes and the
services and products we deliver to our clients through the
adoption of digital technologies.
Creating a world fit for the future 13
Chief Executive’s statement
Our global experts are crucial to the delivery of our strategy
and to the success of our business. We strive to recruit the best
talent and to retain a diverse and inclusive workforce through
apprenticeships, graduate recruitment and industry hire
programmes. We invest in the development of the skills and
competencies of our staff, providing equal opportunities for all.
Our teams develop technologies and innovation relevant to
the many sectors in which we operate, and which are necessary
to accelerate the move to a cleaner and more sustainable
world. It is this international team that brings technology and
innovation to life with our clients through projects and long-
term programmes which range from technology and market
assessments, to policy development, product development and
high-performance, niche manufacturing.
Further information on the execution of our strategy can be
found between pages 18 and 19.
Highlights from the year
We closed the year with a good order intake of £386m and a
year-end order book of £314m. The Group delivered an increase
in revenue of 2% to £384.4m (FY 2017/18: £378.5m(*)) and
underlying profit before tax was broadly in line with the prior
year at £37.0m (FY 2017/18: £37.5m(*)). For statutory reporting
purposes, profit before tax was £26.5m (FY 2017/18: £27.0m(*)).
Further details on the results for the year are provided in the
Financial Review on pages 30 to 35.
All our Performance Products businesses performed strongly,
with increasing revenue across its High-Performance Vehicles
& Motorsport, Defence and Software sectors. The High-
Performance Vehicles & Motorsport and Defence sectors also
saw an increase in profitability.
Within High-Performance Vehicles & Motorsport, our
manufacturing and assembly business went from strength to
strength, reaching the key milestone of delivering over 20,000
engines for McLaren within the past 10 years, and with a record
output of over 5,000 engines this financial year. I am also
pleased that we have signed a third-generation engine supply
agreement with McLaren: this is the largest ever signed by
Ricardo and will see us delivering engines through to the
late 2020s.
The growth in Defence was due to the ramp-up in
deliveries of its anti-lock brake and electronic stability control
system (known as ‘ABS brake kits’) for the High-Mobility
Multipurpose Wheeled Vehicle (‘HMMWV’, or Humvee). More
than 1,500 units were successfully delivered to the US military
during the financial year.
Our Technical Consulting business in Energy & Environment
performed particularly well this year. Our Rail business
performed in line with the prior year, as headwinds in
orders and revenue across a number of geographies were
mitigated through operational efficiency initiatives and strong
management of its project portfolio.
Challenging prevailing conditions in the global automotive
market continued to have an adverse impact on revenue and
profitability in our Automotive businesses across Europe and the
US. China also performed well, but the flow of orders slowed
towards the end of the year.
Another loss was made in the US as it continues to reposition
itself as a more agile operation with a greater focus on electrified
and new-energy vehicles and through active test asset
reduction plans. Our purchase of the Detroit facility post year-
end removes the business from its long-term lease commitment
and provides the flexibility to take further strategic actions.
The weaker performance across the Automotive business as a
whole was largely offset by strong results elsewhere across the
Group, demonstrating its resilience and the justification of our
diversification strategy across market sectors and geographies.
This year we have made further progress in the development
(*) Financial information for FY 2017/18 has been restated for the transitional impact of adopting IFRS 15 Revenue from Contracts with Customers from 1 July 2018 and is presented on a like-for-like basis
with FY 2018/19. The impact of the restatement is set out in Note 38(a) to the financial statements on pages 170 and 171.
Ricardo delivered over 5,000 engines to
McLaren this year across an increased number
of engine variants, including the 720S Spider
14 Ricardo plc Annual Report & Accounts 2018/19
Chief Executive’s statement
Aventra passenger train. The project blended Roke’s expertise
in cyber security and supporting critical national infrastructure
with Ricardo’s domain knowledge of rail operations, rolling stock
design, systems engineering and passenger interactions.
We have prepared for a range of possibilities for Brexit and
any disruption that may arise around the intended transition
date. For instance, we have secured a European accreditation
route for our Rail business to supplement our existing UKAS
accreditation, which allows us to continue to offer our services
across Europe. We have also assessed inventory holding patterns
for our McLaren production line to prepare for the possibility of
European customs disruption.
We are now bidding our European research funding
programmes through our office in the Netherlands, having
worked closely with the EU to ensure we can continue to be
a partner in the provision of leading-edge technology in the
future. We also continue to closely monitor the potential impact
of Brexit and the ongoing uncertainty around the movement of
staff between the UK and the European Union, and to ensure we
have a robust supply chain for any overseas resources required.
Our success is a result of our people and their skills, our
technical expertise, our innovation and passion – all of which are
channelled into solving the global and societal issues for which
solutions are demanded, and which our clients clearly face. Our
mission is to create a world fit for the future.
Further examples of how Ricardo’s community has delivered
innovative solutions and created value for its clients across the
world are summarised below and presented in the Case Studies
section from pages 48 to 73.
• Rail: Smarter rail electrification
• Energy & Environment: Supporting Australia’s circular economy
• Defence: Helping NASA navigate ‘big data’
• Automotive: Reducing motion sickness in autonomous vehicles
• Motorcycle: Smart, urban, and every inch a BMW
• Software: Spark of inspiration for natural gas engines
Outlook
Our continued focus is on addressing the core issues
created by increasing global population, industrialisation
and urbanisation through the application and provision of
leading-edge consulting, engineering and product solutions.
This is underpinned by our strategy of diversification in the
geographies and markets of the customers that we serve – all of
which gives us confidence for Ricardo’s continued growth and
relevance on the world stage.
Current political and economic uncertainties aside, we are
well positioned for growth from a strong, diversified order book
and pipeline, recurring revenue from long-term production
programmes and the benefit of recent acquisitions.
Dave Shemmans
Chief Executive Officer
Creating a world fit for the future 15
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Ricardo assisted BMW Motorrad with the C 400
series scooters (see case study on pages 66 to 69)
of this diversification strategy, initially with the organic
expansion into the Australian market by our Energy &
Environment business, winning several projects related to
waste and resources management and growing its local
team, followed by the acquisition of PLC Consulting Pty Ltd
(‘PLCC’), subsequently renamed Ricardo Energy Environment
and Planning Pty Ltd, which was completed after the year-end
in July 2019. We also acquired Transport Engineering Pty Ltd
during the year, subsequently renamed Ricardo Rail Australia
Pty Ltd, a leading railway technical advisor and consultancy
with capabilities complementary to those of our existing Rail
business; this gives Ricardo a sizeable footprint in the rapidly
growing Australian rail market.
We continue to evolve our strategy and our capabilities in
electrification, cyber security and digitalisation, all of which are
trends that have an impact across all the markets we serve and
where Ricardo is already delivering innovative solutions.
We deliver state-of-the-art electrification programmes for
on-vehicle applications and off-vehicle infrastructure. Such
programmes have included the development of: a compact,
high-performance 48V e-motor; an e-axle transmission; a
single-speed EV transmission which draws upon research and
technology that we have proven in markets from supercars
to Formula E; and a ground-breaking field trial by UK Power
Networks exploring the use of smart grid technology to unlock
spare capacity for increased electric vehicle use.
We further developed our collaborative relationship with
Roke, with the launch of our combined ‘Digital Resilience Lab’.
We delivered the first Ricardo-Roke project in the rail sector
to implement a new approach for managing digital risk in
connected transport systems, focusing on the Bombardier
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Market overview
Rapid
urbanisation
Air quality and
climate change
Energy security
and sustainability
Connectivity and
intelligent devices
Natural resource
scarcity
Global
stability
•
Increasing demand for public services
and infrastructure as well as the
expansion of the 5G network and
connected products driving the
development of smart cities;
• Growth in urban mass-transit systems
and international high-speed rail;
•
•
Increasing demand for transport
and energy solutions which improve
efficiency and reduce carbon
emissions; and
Increasing emphasis on waste
reduction and environmentally sound
waste management.
• Air quality is a key global health
concern;
•
Increasingly challenging long-term
greenhouse gas emissions targets set
as part of the Paris Agreement;
• Stricter fuel economy and CO2
regulations in most developed
countries; and
• Continued interest and investment in
low carbon fuels, hybrid technologies,
fuel cells and electrification.
• Significant growth in renewable energy
sources required to reach the targets
set as part of the Paris Agreement;
• Consumer demand and policies at
government and city level driving the
electrification agenda; and
•
Increasing focus on decarbonisation of
the energy sector.
• Experts in critical and complex
railway systems and providers of rail
engineering assurance services;
• Technology leadership in vehicle fuel
economy, powertrain electrification
and battery electric vehicles;
• Working with cities across the world
• Respected international authority on
on policy, optimisation, validation and
integration of smart systems;
urban air quality;
• Longest established specialist air
• Recognised industry solutions
quality team in the world;
provider for vehicle electrification and
autonomous vehicle systems; and
• Extensive capability in waste treatment
technologies, supporting customers
in the categorisation and assessment
of different technologies for capacity,
feedstock suitability, outputs and
energy recovery efficiency.
• Solutions provider for vehicle emissions
reduction and aftertreatment
technology; and
• Supplier of software solutions to deliver
the more fuel efficient and sustainable
automotive products of the future,
powered by internal combustion
engines, electric motors and hybrid
technologies.
• Supporting governments and public
organisations to define energy and
electric vehicle strategies and policy;
• Leading capability in power sector
investment planning, renewable
electricity and heat transmission and
distribution, smart grids, international
electricity markets and industry
regulation;
• World-leading experts with deep
understanding of the technical and
economic challenges of developing
intelligent networks in urban energy
systems and in rural and off-grid
settings; and
• Drawing upon expertise in hybrids and
electrical control systems, batteries
and engines applicable across the
automotive and rail sectors.
• Ricardo serves customers across a number of markets, all of which are highly competitive and undergoing rapid change;
• Our customers include privately and publicly-owned businesses of different sizes, governments, government organisations,
inter-governmental and international agencies and public authorities;
• Our Technical Consulting business, which primarily operates in the automotive, rail and energy sectors, serves major
transportation original equipment manufacturers (‘OEMs’) and operators, new entrants into electric and autonomous vehicles,
tier 1 and niche component suppliers, and other private and public-sector clients around the world;
• We compete against a small number of large consultancies in international markets as well as against a larger number of small,
specialised consultancies present in national and local markets. These competitors include engineering, environmental and
strategic consultancies, as well as providers of certification and assurance services to the rail sector;
16 Ricardo plc Annual Report & Accounts 2018/19
• Rapid growth in the use of
• Growing water scarcity impacting
• Exponential increase of products and
sophisticated digital data generation
and analysis systems in many sectors
for increased safety and efficiency;
• Development of connected
autonomous and intelligent transport
technologies leading to Mobility as a
Service (‘MaaS’); and
•
Increasing application of artificial
intelligence technology and
virtualisation of engineering processes
to reduce development costs and bring
products to market faster.
industries and countries;
• The acceleration of soil erosion and
degradation leading to a decrease in
the extension of cultivable land;
• Biodiversity, oceans and forests under
increasing stress; and
•
Increasing emphasis on waste
reduction in all sectors of the economy.
critical infrastructure connected to
the Internet, driving demand for cyber
resilience solutions to prevent cyber
threats which have the potential to
create havoc in organisations and
governments;
• Growing demand from governments
and society for solutions to address the
risks of climate change; and
• Continuing unrest in many nations
requiring UN and NATO forces to
maintain and upgrade their defensive
capabilities.
• Our ‘Intelligent Rail’ suite of products
• Strong technical expertise and practical
• Digital resilience partnership with
and services offers bespoke analysis
experience across all aspects of
Roke working on the cyber security of
tools and methodologies designed to
sustainable water and environmental
connected infrastructure across rail,
address the needs of the rail sector;
management;
automotive and energy sectors;
• Our Virtual Reality Engineering Design
• Extensive experience of providing
• Climate finance experts provide
Review application promotes effective
high-quality economic analysis and
strategic advice, technical analysis
and efficient design optimisation by
geographically dispersed teams; and
• Our Strategy Consulting Mobility
service helps customers to exploit the
insight to governments and businesses
and modelling, capacity building, and
worldwide to inform the decision-
making processes for scarce natural
resources allocation;
training;
• Crisis management team offers services
aimed at enabling clients to develop
opportunities of new and connected
• Our environmental experts help clients
their own levels of preparedness and
transportation technologies to
understand their agricultural challenges
resilience in the face of unexpected
maximum commercial, environmental
and implement sustainable solutions
weather events, natural disasters,
and societal effect.
that deliver effective results; and
terrorism and cybercrime; and
• Helping private and public-sector
• Our Defence business delivers world-
organisations to develop and apply
circular economy strategies.
class products and systems, enabling
our customers to ‘protect those who
protect us’.
Rapid
urbanisation
Air quality and
climate change
Energy security
and sustainability
Connectivity and
intelligent devices
Natural resource
scarcity
Global
stability
Market overview
•
Increasing demand for public services
• Air quality is a key global health
• Significant growth in renewable energy
• Rapid growth in the use of
• Growing water scarcity impacting
and infrastructure as well as the
expansion of the 5G network and
connected products driving the
development of smart cities;
concern;
•
Increasingly challenging long-term
sources required to reach the targets
set as part of the Paris Agreement;
greenhouse gas emissions targets set
• Consumer demand and policies at
as part of the Paris Agreement;
government and city level driving the
• Growth in urban mass-transit systems
and international high-speed rail;
• Stricter fuel economy and CO2
regulations in most developed
•
Increasing demand for transport
countries; and
electrification agenda; and
•
Increasing focus on decarbonisation of
the energy sector.
and energy solutions which improve
efficiency and reduce carbon
emissions; and
•
Increasing emphasis on waste
reduction and environmentally sound
waste management.
• Continued interest and investment in
low carbon fuels, hybrid technologies,
fuel cells and electrification.
• Experts in critical and complex
• Technology leadership in vehicle fuel
• Supporting governments and public
railway systems and providers of rail
economy, powertrain electrification
engineering assurance services;
and battery electric vehicles;
organisations to define energy and
electric vehicle strategies and policy;
• Working with cities across the world
• Respected international authority on
• Leading capability in power sector
on policy, optimisation, validation and
urban air quality;
integration of smart systems;
• Longest established specialist air
• Recognised industry solutions
quality team in the world;
provider for vehicle electrification and
autonomous vehicle systems; and
• Solutions provider for vehicle emissions
reduction and aftertreatment
regulation;
• Extensive capability in waste treatment
technology; and
technologies, supporting customers
in the categorisation and assessment
of different technologies for capacity,
feedstock suitability, outputs and
energy recovery efficiency.
• Supplier of software solutions to deliver
the more fuel efficient and sustainable
automotive products of the future,
powered by internal combustion
engines, electric motors and hybrid
technologies.
investment planning, renewable
electricity and heat transmission and
distribution, smart grids, international
electricity markets and industry
• World-leading experts with deep
understanding of the technical and
economic challenges of developing
intelligent networks in urban energy
systems and in rural and off-grid
settings; and
• Drawing upon expertise in hybrids and
electrical control systems, batteries
and engines applicable across the
automotive and rail sectors.
sophisticated digital data generation
and analysis systems in many sectors
for increased safety and efficiency;
• Development of connected
autonomous and intelligent transport
technologies leading to Mobility as a
Service (‘MaaS’); and
•
Increasing application of artificial
intelligence technology and
virtualisation of engineering processes
to reduce development costs and bring
products to market faster.
• Our ‘Intelligent Rail’ suite of products
and services offers bespoke analysis
tools and methodologies designed to
address the needs of the rail sector;
• Our Virtual Reality Engineering Design
Review application promotes effective
and efficient design optimisation by
geographically dispersed teams; and
• Our Strategy Consulting Mobility
service helps customers to exploit the
opportunities of new and connected
transportation technologies to
maximum commercial, environmental
and societal effect.
industries and countries;
• The acceleration of soil erosion and
degradation leading to a decrease in
the extension of cultivable land;
• Biodiversity, oceans and forests under
increasing stress; and
•
Increasing emphasis on waste
reduction in all sectors of the economy.
• Exponential increase of products and
critical infrastructure connected to
the Internet, driving demand for cyber
resilience solutions to prevent cyber
threats which have the potential to
create havoc in organisations and
governments;
• Growing demand from governments
and society for solutions to address the
risks of climate change; and
• Continuing unrest in many nations
requiring UN and NATO forces to
maintain and upgrade their defensive
capabilities.
• Strong technical expertise and practical
• Digital resilience partnership with
experience across all aspects of
sustainable water and environmental
management;
Roke working on the cyber security of
connected infrastructure across rail,
automotive and energy sectors;
• Extensive experience of providing
• Climate finance experts provide
high-quality economic analysis and
insight to governments and businesses
worldwide to inform the decision-
making processes for scarce natural
resources allocation;
• Our environmental experts help clients
understand their agricultural challenges
and implement sustainable solutions
that deliver effective results; and
• Helping private and public-sector
organisations to develop and apply
circular economy strategies.
strategic advice, technical analysis
and modelling, capacity building, and
training;
• Crisis management team offers services
aimed at enabling clients to develop
their own levels of preparedness and
resilience in the face of unexpected
weather events, natural disasters,
terrorism and cybercrime; and
• Our Defence business delivers world-
class products and systems, enabling
our customers to ‘protect those who
protect us’.
• Our Performance Products business competes with divisions of automotive OEMs and providers of niche-volume production
solutions in other performance-driven markets. We also compete with a range of developers of engineering and complex
systems simulation software serving many of the markets in which we operate; and
• At Ricardo our key differentiators are our leading technical and strategic capabilities, the proven track record of our dedicated
and talented teams of consultants, engineers, and scientists delivering innovative services and products across all of the markets
we serve. We are also distinguished by our development of advanced niche-volume production solutions for the automotive
industry and other high-performance markets.
Creating a world fit for the future 17
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Strategic performance
The Board monitors performance indicators related to our strategic objectives
1 Business growth: profitable growth delivered by focusing on future trends and
market demands driven by client needs, technology change and prevailing or
impending policies and regulation
More detail on these principal
risks together with how they are
mitigated is presented on pages
45 and 46
Performance indicator
Commentary
Order book
£m
2018/19
2017/18
2016/17
Revenue
£m
2018/19
2017/18
2016/17
314
295(*)
248
384.4
378.5(*)
352.1
Net debt
£m
2018/19
(47.4)
2017/18
2016/17
(26.1)
(37.9)
We closed the year with a record order book of £314m, up 6% on the prior year.
This included £13m for ABS brake kits and £30m from the Transport Engineering
acquisition.
Order intake in Technical Consulting declined, primarily in our European
Automotive business and towards the end of the year in China, as a result of the
continued global uncertainty across the industry. Our legacy Rail business was also
impacted by lower volumes in the current year. In the prior year, order intake in
both Automotive and Rail benefitted from several large, multi-year orders. These
impacts were partially offset by strong growth in Performance Products in the
current year.
There has been a significant reduction in revenue in Technical Consulting, primarily
in our European Automotive business. This has largely been offset by growth
in Performance Products, driven by sales of ABS brake kits and higher volumes
of engines and transmissions. In considering growth on a like-for-like basis in
Technical Consulting, had Control Point Corporation been owned for the full
year, revenue in FY 2017/18 would have been £2.2m higher. Technical Consulting
revenue in FY 2018/19 includes £1.4m from Transport Engineering following its
acquisition in the year.
More details of this are described in the Financial Review section on pages 30 to
35, and also in the Technical Consulting and Performance Products sections on
pages 20 to 25 and 26 to 27, respectively.
The Group had a net cash outflow of £21.3m in the year. This includes
£18.9m spent on acquisitions, net of cash acquired, £3.5m of acquisition-
related payments, and a net £2.5m cash outflow from restructuring activities.
Contributions of £4.3m were also paid to the defined benefit pension scheme.
Principal risks
Customers and markets
Brexit
Contracts
Customers and markets
Brexit
Contracts
Financing
Defined benefit
pension scheme
2 Risk mitigation: reducing risk through the mitigation of business cyclicality and the avoidance of external
dependency, whether geographic, technical, industry sector or client-related
Performance indicator
Commentary
Sector diversity
Number of sectors exceeding 10%
of revenue
2018/19
2017/18
2016/17
4
4
5
Four of our six sectors exceeded 10% of revenue, demonstrating that the Group
remains well diversified across its critical market sectors.
Revenue in our Automotive sector as a proportion of total Group revenue
reduced by 6%. This was offset by growth in High-Performance Vehicles &
Motorsport and Defence.
Principal risks
Customers and markets
Technology
Customer dependency
Number of customers exceeding 5%
of revenue
2018/19
2017/18
2016/17
2
2
2
The number of customers from whom revenue was generated that exceeded
5% of total revenue has remained consistently low over the last three years.
Revenues from one customer represent approximately £74.5m (19%) of the
Group’s revenue.
Whilst we retain a small number of key client relationships, we continue to
have a diverse customer base.
Customers and markets
Brexit
18 Ricardo plc Annual Report & Accounts 2018/19
Strategic performance
3 World-class talent: ensuring a working environment that attracts, develops and motivates a diverse,
world-class team and fosters industry thought leadership
Performance indicator
Commentary
Principal risks
Employee and
knowledge retention
Voluntary employee turnover %
per annum
2018/19
2017/18
2016/17
15
15
14
The level of voluntary attrition has remained stable and is consistent with current
expectations, but continues to be at a relatively high level primarily due to some
significant changes to organisational structures within our Automotive business.
Active employment markets also continue to impact our voluntary attrition levels,
with high demand for our experienced consultants, engineers and scientists from
around the world who are experts in their respective fields.
People
Brexit
4 Operational excellence: maintenance of an optimised cost base through an efficient global operation and
the development of leading-edge tools, processes and capabilities to maximise value from our resources
Performance indicator
Commentary
Underlying(1) operating
profit margin
%
2018/19
2017/18
2016/17
10.3
10.5(*)
11.6
The decrease in the Group’s underlying(1) operating profit margin was primarily due
to Technical Consulting, driven by lower revenues in the Automotive business. This
was partially offset by higher margins in Energy & Environment, which benefitted
from increased order intake in the current year, combined with prior year profitability
being adversely impacted by recruitment ahead of growth in orders. This was further
offset by increased margins in Performance Products, driven by the ramp up in the
ABS brake kits programme.
Further details are described in the Financial Review from pages 30 to 35.
Principal risks
Contracts
Customers and markets
Environment
tCO2e per employee for scope 1
and scope 2 emissions
2018/19
2017/18
2016/17
3.8
6.0
6.7
Scope 1 emissions vary based on project mix. We encourage improvements to
reduce underlying emissions and to improve effective use of resources on projects.
Our emissions per employee decreased again this year, primarily due to reduced test
activity in Automotive and the impact of the sales of the Chicago and Schechingen
test facilities in the prior year, together with a reduction in tonnes of carbon dioxide
equivalent (‘tCO2e’) per kWh in UK electricity generation.
Laws and regulations
5 Added value for clients: provision of in-demand products and services through our commitment to market-leading
research, development and innovation aimed at providing maximum and enduring benefits to our customers
Performance indicator
Commentary
The reported R&D spend increased due to expensed research on innovative
engineering activities, capitalised costs to develop new technology, tools
and processes in our Technical Consulting business, together with continued
investment in developers of our software products in our Performance Products
business.
Further details of active R&D projects are given in pages 28 and 29.
Principal risks
Technology
Customers and markets
Customer satisfaction remains consistently strong at over 8 out of 10 over the
past three years.
Contracts
Customers and markets
Research and development
spend
£m
2018/19
2017/18
2016/17
13.4
9.5
9.5
Customer satisfaction
Ratings out of 10 across a range
of measures
2018/19
2017/18
2016/17
8.8
8.7
8.7
(*) Financial information for FY 2017/18 has been restated for the transitional impact of adopting IFRS 15 Revenue from Contracts with Customers from 1 July 2018 and is presented on a like-for-like basis with
FY 2018/19. The impact of the restatement is set out in Note 38(a) to the financial statements on pages 170 and 171.
(1) Underlying measures exclude the impact on statutory measures of specific adjusting items as set out in Note 4 to the financial statements on page 139. Underlying measures are considered to provide
a more useful indication of underlying performance and trends over time and can be found, together with a reconciliation to equivalent statutory measures, on the income statement in the financial
statements on page 124.
Creating a world fit for the future 19
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Technical Consulting
Performance
Ricardo’s Technical Consulting business generates around 70%
of the Group’s revenue and underlying operating profit from its
consultancy businesses working in our global market sectors
of Energy & Environment, Rail, Automotive, Off-Highway &
Commercial Vehicles, and Defence.
Highlights can be found on pages 22 to 25. As set out in Note 2
to the financial statements, revenue and underlying operating
profit decreased by 6% to £270.5m (FY 2017/18: £286.8m(*)) and
by 9% to £27.7m (FY 2017/18: £30.4m(*)), respectively.
Order intake in the year stood at £261m (FY 2017/18: £323m).
This was largely due to the award of several large and
non-recurring multi-year programmes in the prior year,
combined with reduced levels of orders in the current year. The
lower volume of orders had an adverse impact on operational
efficiency and underlying operating profit margin, which
decreased to 10.2% (FY 2017/18: 10.6%(*)). New orders were
still balanced across all core regions and with good levels of
diversification across different market sectors.
Ricardo Energy & Environment performed strongly and
expanded its geographic presence and portfolio of services in
the year. The business won a number of projects in the waste
and resources sectors in Australia and acquired PLC Consulting
post year-end. The business has also seen growth in demand
for its services in several areas, including air quality, energy and
digital solutions.
More stringent regulations in urban environments and
stakeholders’ ambitions to improve the quality of city life have
driven the demand for our air quality services, while our energy
practice has won projects in both the UK and internationally to
support the evolution of energy networks and the development
and application of renewable energy and innovative clean
energy technologies.
In addition to our traditional consultancy services, customers
are also interested in digital solutions and products which can
help them tackle environmental issues; we have seen good
demand in this area. Our National Chemical Emergency Centre
has also continued to grow and expanded its services with the
development of a new crisis management offering.
Ricardo Rail’s performance was achieved despite a backdrop
of challenging market conditions that had an adverse impact
on its revenue in certain geographies. The business delivered
a number of innovative projects, applying its extensive system
engineering, cyber security and assurance capabilities. The
business also entered the growing Australian market, with
the acquisition of Transport Engineering (‘TE’), subsequently
renamed Ricardo Rail Australia, a leading rail engineering
consultancy with capabilities that are highly complementary to
our existing offering.
Our Automotive businesses saw a low level of activity,
particularly in Europe, as demand for passenger-car outsourced
engineering services was dampened by Brexit, trade policy
actions and the initiatives of original equipment manufacturers
(‘OEMs’) to reduce costs and rebalance investments towards
vehicle electrification and autonomy. The automotive industry as
a whole is experiencing reduced sales globally, with many OEMs
undergoing restructuring plans as they adjust their headcounts
to new sales levels and a rapidly changing technological
landscape, as necessitated through increased electrification.
The demand for our services in both the Motorcycle and Off-
Highway & Commercial Vehicles markets remained at a good
level – albeit not at the level required to offset the significant
reduction in volumes of orders in the Passenger Car market. We
have won projects that are focused on electrified and connected
products, platooning technology and fuel-cell technology across
these sectors.
As the industry moves towards increased digitalisation of
processes and products, we have increased our investment in
cyber security, simulation and digitalised capabilities to deliver
innovative solutions which benefit our clients. The collaboration
(*) Financial information for FY 2017/18 has been restated for the transitional impact of adopting IFRS 15 Revenue from Contracts
with Customers from 1 July 2018 and is presented on a like-for-like basis with FY 2018/19. The impact of the restatement is set
out in Note 38(a) to the financial statements on pages 170 and 171.
20 Ricardo plc Annual Report & Accounts 2018/19
with Roke to develop cyber resilience solutions for vehicles,
critical infrastructure and rail systems has resonated with clients
and we have signed a memorandum of understanding to
maximise the benefits of our joint offer.
Ricardo Defense operates in both the US and the UK and
delivered a strong performance in the year, underpinned by the
continued demand for our capabilities in software development,
and the electrification and hybridisation of powertrains. The
performance of the US business acquired in the prior year,
formerly Control Point Corporation, has provided robust revenue
growth and, together with the core Ricardo Defense business, is
building strong momentum in this sector.
Business model
Ricardo’s Technical Consulting business provides engineering,
technical, strategic and environmental consulting services to
private and public-sector customers, primarily in the Energy
& Environment, Rail, Automotive, Off-Highway & Commercial
Vehicles, and Defence markets, together with accreditation and
independent safety assurance services in the Rail sector. Our
services are delivered for a scope of work which is specific to our
customers’ needs and our projects range in length from a few
weeks or months to programmes that extend over several years.
Technical Consulting
Our services are based on the multi-industry knowledge
and deep technical expertise of our staff, on the application
of intellectual property and know-how developed through
our investment in research and development (‘R&D’), and on
our excellence in the management of projects, resources and
customer relationships. Our capabilities are complemented
by a wide range of design, test and development tools and
equipment, together with the application of shared engineering
processes across our worldwide network.
People are at the heart of our success and our staff include
experienced professional consultants, engineers and scientists
with a mix of backgrounds, cultures, expertise and outlook. We
also have a thriving graduate and apprenticeship recruitment
programme.
Our global infrastructure helps us to meet the needs of our
customers in the different industries and sectors we serve.
Ricardo has 51 sites in 20 countries, with technical centres in the
US, the UK, the Netherlands, Italy, the Czech Republic and China,
supported by offices where a local presence is needed to service
our customers.
Bombardier’s Aventra passenger
train is the subject of the first
rail project for the Ricardo-Roke
Digital Resilience collaboration,
which is providing an in-depth
cyber security assessment of the
vehicle
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Ricardo plc Annual Report & Accounts 2018/19 21
Technical Consulting
Market sector highlights
Energy & Environment
Ricardo Energy & Environment developed further in the UK,
expanded internationally and saw growth across a variety of its
sectors and services.
This year we have seen good growth in Australia where we
have won projects in the waste and resources area, ranging
from strategic circular economy studies to detailed feasibility
assessments for waste-to-energy technology. After the year-
end we completed the acquisition of PLC Consulting, which
has strong technical advisory capability in the full infrastructure
and environmental planning life cycle, and complements and
extends Ricardo’s existing energy and environment capabilities.
International growth elsewhere has been driven by specific
themes in the industry, including international measurement,
reporting and verification work at national and city level,
and the provision of tailored capacity building and technical
assistance to support actions for the mitigation of greenhouse
gas (‘GHG’) emissions.
Other areas where we have seen robust demand are in
energy, environmental and transport policy, and air quality.
The widely forecasted changes in energy demand, linked to
the significant predicted uptake in electric vehicles (‘EVs’), have
seen our energy and transportation specialists win projects to
support the evolution of the energy network and recharging
infrastructure, as well as planning for fleets to utilise EVs.
This year we have also further developed our energy sector
innovation activities and have supported the UK Government’s
Department for Business, Energy and Industrial Strategy (‘BEIS’)
with technical advice for its Energy Innovation Investment
Portfolio.
Our internationally renowned specialists in air quality have
seen growing demand to help design and develop air-quality
Ricardo Energy & Environment’s air quality experts in
Nigeria as part of a project supporting sub-Saharan African
megacities in transformational climate change mitigation
22 Ricardo plc Annual Report & Accounts 2018/19
Ricardo’s Glasgow-
based environmental
consultants
supporting a range
of activities for the
UK’s National Clean
Air Day
strategies and plans that improve health outcomes. This year
we have been involved in delivering a significant project for air-
quality improvements in the Greater Beijing-Tianjin-Hebei region
of China, while in the UK we continued to support central and
local government around clean air zones.
We have also seen strong demand from the European
Commission. A core project has been strengthening the
capacity of EU member states to implement effective national
policies for reducing GHG emissions from sources such as
transport, agriculture and buildings; the work has ranged
from the identification of potential new policy options to the
assessment of the impacts realised by existing policies. Demand
for environmental support at airports also continued to grow in
the year.
In addition to our traditional consultancy services, we have
seen growing interest in digital solutions and products to
enable customers to gather greater insight from their data
and become proactive in tackling environmental issues. The
combination of our in-house digital development team and
environmental specialists enables us to create robust market-
differentiated solutions.
Our National Chemical Emergency Centre (‘NCEC’) continued
to perform well. NCEC celebrated its 100th customer in China,
as part of its partnership with the Chinese National Registration
Centre for Chemicals. NCEC developed a new crisis management
service, which has achieved traction with customers, including a
contract with the UK Environment Agency to provide training on
incident response to over 1,200 of its employees.
Rail
We acquired TE on 31 May 2019, which not only marks our entry
into Australia’s thriving domestic rail market, but also reinforces
our capabilities within the Asia-Pacific region by providing
additional resources in key technical disciplines such as safety
engineering, ‘Reliability, Availability, Maintainability and Safety’
(‘RAMS’) analysis, systems integration, human factors and rolling
stock testing.
The following major assignments were secured during the
financial year:
• Ricardo’s appointment by the UK-based rolling stock owner,
Porterbrook, to integrate a hybrid powerpack into a Diesel
Multiple Unit (‘DMU’) to test the vehicle’s ability to switch to
Technical Consulting
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battery power when moving through an urban area. This is a
first in the UK rail industry;
• A new framework agreement with Spain’s national rail
infrastructure manager, Adif, to provide assurance services for
planned track and signalling upgrade programmes; and
• Safety assessment roles on the Seoul Metro system and
Singapore’s SMRT network.
This year also saw the completion of works for Amsterdam’s
North-South metro route, which commenced operations in the
Ricardo Software hosted a three-day seminar on advanced hybrid vehicle
acoustics in November 2018 at Zhejiang University in Hangzhou, China
summer of 2018. Ricardo has provided technical support for the
programme for almost a decade, with teams working on rolling
stock, infrastructure and power-supply aspects of the project.
The experience has enhanced the team’s reputation within the
industry for applying a systems engineering approach to major
programmes.
The Group also secured the first rail project for the Ricardo-
Roke Digital Resilience collaboration to provide an in-depth
cyber security assessment of Bombardier’s Aventra passenger
train, a landmark for the industry. The contract is one of the first
examples of a major train manufacturer seeking to integrate
cyber security assessments into its design and testing processes.
It is also illustrative of how the industry’s major stakeholders are
paying closer attention to the risks and vulnerabilities that will
emerge from a more digitally-oriented rail service, and our teams
have been actively recruiting to ensure that we can continue to
support the industry in this growing area of concern.
Automotive
Whilst air quality and CO2 reduction remained a top global
priority for the sector, the passenger-car market has been
impacted by Brexit and tariff actions from the US administration,
which has resulted in a slowdown in the European market
Ricardo Energy & Environment has signed an agreement to collaborate with a joint venture between Tata Power
and local government, to deliver innovation and improved quality of service for energy consumers in Delhi, India
Creating a world fit for the future 23
Technical Consulting
and in China towards the end of the year. OEMs have
announced significant cost-reduction programmes designed
to maintain trading performance whilst protecting new
product developments in all aspects of vehicle electrification
– everything from mild hybrids to full battery electric vehicles
(‘BEVs’), connected vehicles, vehicles with greater autonomy,
and virtual product development. These changes have led to
uncertainty in outsourcing trends, with reduced levels of orders
across our Automotive business globally.
We have secured a range of programmes across all areas of
our business: in vehicle systems, hybrid and electric systems,
advanced drivelines and in core powertrains, focused on
both new and upgraded products. The application of fuel cell
technology into a wide range of on-road vehicles has become a
priority for many in the industry and has resulted in a significant
increase in opportunities for Ricardo.
Ricardo's Future Vehicle
Architecture ('FuVA') concept
provides a fully scalable
multi-energy platform to
maintain vehicle attributes
while reducing unit costs and
development time to market
Consistent with the industry-wide trend towards increased
electrification, we continue to follow our strategy of reducing
international combustion-focused test facilities to create a more
flexible cost base and we are marketing our test assets in Detroit
for sale.
We have increased the level of investment in developing
new simulation and digital capabilities, with the clear goal of
delivering differentiated solutions to our customers. In the
automotive sector the costs associated with new-vehicle
development programmes can be significantly offset as levels
of digitalisation increase during the development phase. Our
goal in deploying such tools and processes is to halve the
development duration and cost within the next ten years.
In the meantime, we continue to invest in advanced
electrification, internal combustion, transmission solutions
and other key technologies to improve overall vehicle system
efficiency. We also see demand in the development of cyber
security resilience solutions for vehicles and have continued to
invest in them through our collaboration with Roke.
Ricardo Motorcycle continued to deliver complete
development programmes for motorcycles, scooters and urban
mobility vehicles. We have seen growth in demand, driven by
tightening emissions legislation and have been engaged in a
number of programmes focused on electrified and connected
products, as well as powertrain developments for future
emissions requirements.
24 Ricardo plc Annual Report & Accounts 2018/19
Off-Highway & Commercial Vehicles
Ricardo’s wide range of powertrain and system integration
capabilities has enabled the business to meet global customer
demands for enhanced vehicle performance at a lower total
cost of ownership, whilst meeting all existing and predicted
legislation. We are delivering a number of new product
programmes for core engine and transmission systems for
clients in Europe and Asia.
Based on our proven track record in platooning technology,
we secured a new contract to develop a demonstration
platform for two Asian OEMs. We also continue our long-term
strategic relationship with Shaanxi Fast Gear, the largest supplier
of transmissions for off-highway and commercial vehicles to the
Chinese market. This collaboration is based at Ricardo’s Midlands
Technical Centre (‘MTC’) in the UK, alongside ongoing advanced
technology development programmes being delivered jointly in
Xi’an, where Fast Gear is based.
In the US, we have continued to focus on supporting our
key clients with in-market On-Board Diagnostics (‘OBD’)
compliance verification and also to work with Toyota in further
developments of its fuel cell technology in the commercial
vehicle market. As fuel cell powertrains once again become an
attractive solution due to the wider availability of renewable
energy sources of hydrogen generation, this unique capability
has created wider opportunities with other clients and in other
territories.
Technical Consulting
Ricardo continues to
work with Toyota to
further develop its fuel
cell technology in the
commercial vehicle
market
Ricardo continues to provide the power generation and
marine markets with services in failure analysis, investigation,
and specialist new product design and development. In these
markets we see increasing demand for high-speed diesel
generator sets and main propulsion systems for marine vessels, as
well as the conversion of engines for gas or dual-fuel operation.
We have also seen fresh opportunities to leverage this core
capability into the rail sector as designers and operators look
to hybridise existing diesel propulsion fleets as a medium-term
alternative to full electrification.
Defence
In the US, Ricardo Defense continues to successfully deliver
wide-ranging engineering programmes across light and heavy
land and sea theatres of operation and is the partner of choice
for many OEMs. The business expertise in defence systems
includes the visualisation, analysis and manipulation of large and
complex data sets used in operational planning. This year Ricardo
Defense was awarded a contract by the United States’ National
Aeronautics and Space Administration (‘NASA’) to develop
advanced data analysis and optimisation software which will be
used in the planning of future deep-space missions.
Ricardo Defense also provides enterprise software which
enables the electronic distribution of technical data with
ensured data integrity and cyber security. The software includes
bi-directional messaging and data synchronisation between
network nodes and provides resilient features for disconnected,
intermittent network environments. Low rate initial production
(‘LRIP’) started with installation on aircraft carriers and amphibious
ships. Full production for fleetwide application is planned.
During the financial year, our UK Defence business established
a special vehicles team that will support niche engine, driveline
and powerpack programmes for defence vehicles, as well as for
other commercial projects. We are also engaging in discussions
on future hybridisation and electrification projects for new and
existing vehicle fleets.
Outlook
We have a good order book across our sectors and regions, and
we are confident that our balanced portfolio of businesses will
help Ricardo Technical Consulting withstand the temporary
volatility and softness in some of the markets we serve, and that
the business will deliver future revenue and profit growth.
Creating a world fit for the future 25
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Performance Products
Performance Products
continues to supply to
customers in the top tier
of motorsport, including
M-Sport and its World
Rally Championship Ford
Fiesta
Performance
The Performance Products business accounts for around 30%
of the Group’s revenue and underlying operating profit. A large
share of the revenue of the business is generated through the
supply of products and services to a single customer.
As described in Note 2 to the financial statements, revenue
increased by 24% to £113.9m (FY 2017/18: £91.7m) and underlying
operating profit increased by 28% to £11.9m (FY 2017/18: £9.3m).
Operating profit was higher than the prior year, primarily due to
increased volumes of engines for McLaren and the ramp up in
volumes on the anti-lock brake and electronic stability control
systems (‘ABS brake kits’) programme for the US Army. Operating
profit margins increased to 10.4% (FY 2017/18: 10.1%). Order intake
significantly increased by 39% to £125m (FY 2017/18: £90m) for
the year. In addition, Ricardo was awarded a contract by the UK
Ministry of Defence (‘MoD’) to manufacture drive units for the
Combat Vehicle Reconnaissance (Tracked) (‘CVR(T)’) vehicle.
The strategy of the Performance Products business is focused
on the development of long-term strategic relationships with
customers and the consistent delivery of high-quality products
and services. This strategy underpins the success of the business,
which continues to win new and large contracts which extend
over several years.
Further details of activities within the year can be found within
the market sector highlights on page 27.
26 Ricardo plc Annual Report & Accounts 2018/19
Business model
Ricardo’s Performance Products business manufactures and
assembles high-quality prototypes and niche volumes of
complex engine, transmission and vehicle products, which are
designed by either our motorsport products design team, by
Ricardo’s Technical Consulting business, or by our customers.
We manage the complete supply chain and earn revenue
through the supply of products that we manufacture or
assemble; revenue is also generated by the manufacturing
consultancy services that we provide. The majority of our
programmes extend over many years and several of them
include agreements for the supply of spare parts and other
support services.
At the heart of our capabilities are our people and their
skills in product design and development, production and
operations management, industrial engineering and supply
chain management.
Our operations include a transmissions manufacturing
facility at our Midlands Technical Centre, an engine assembly
facility at our Shoreham Technical Centre, and an ABS brake
kit assembly facility at our Detroit Technical Center. All are
supported by Ricardo’s global network of technical and
engineering centres in the US, the UK, the Netherlands, Italy,
the Czech Republic and China.
The Performance Products business also includes the
activities of Ricardo Software, which develops advanced virtual
Performance Products
engineering tools for conventional and electrified powertrains,
as well as for complex systems modelling and simulation. Our
computer-aided engineering (‘CAE’) software and technical
support services are provided to both long-established and
new-entry customers from around the world and across all of
the sectors in which we operate.
Our proprietary leading-edge simulation software enables
users to quickly and accurately design, analyse and optimise
new products. Through technology exploration and process
innovation we enable customers to reduce their development
costs and bring products to market faster and with greater
confidence. In addition, our dedicated solutions team helps
to accelerate development cycles with increasingly complex
systems by applying customised and integrated CAE toolchains,
such as dynamic transmission analysis and virtual calibration.
Market sector highlights
High-Performance Vehicles & Motorsport
Demand for the production of McLaren engines has grown in
line with expectations. This year we delivered over 5,200
(FY 2017/18: 4,300) engines across an increased number of
engine variants, including the McLaren 570S Coupé, 570GT, 570S
Spider, 720S, 720S Spider and the Senna.
We manufacture and assemble the world’s most advanced
transmissions and have made good progress in the preparations
for the supply contract for the Aston Martin Red Bull Valkyrie
hypercar transmission, which is due to enter production in early
2020. We also continued to support Bugatti with the supply of
the complete driveline system for the Chiron, and maintained
our supply of transmissions for the Porsche 991 Cup race cars.
Ricardo remains a key supplier to the motorsport sector. This
year the Performance Products business developed upgrades for
the M-Sport World Rally Championship (‘WRC’) programme and
won contracts to support key manufacturers within the Formula
E Championship for the third consecutive season.
We continued to manufacture for Formula One, the Japanese
Super Formula Championship, Indy Lights and the World Series
Formula V8 3.5. We also operated supply programmes for
Ricardo-designed transmissions for BMW, the Multimatic-built
Ford GT3, the M-Sport Ford Fiesta WRC, and the M-Sport Bentley
GT customer racing programme, as well as for other top-flight
rally and GT customers.
Defence
In the US, Ricardo Defense has delivered 1,650 ABS brake kits for
the High-Mobility Multipurpose Wheeled Vehicle (‘HMMWV’, or
Humvee). Ricardo’s ABS brake kit system has also been selected
by Bollinger Motors for series production application on its fully-
electric sport utility truck.
In the UK, Ricardo continues to support the British Army’s
fleet of Cougar and Weapons Mount Installation Kit (‘WMIK’)
vehicles with the supply of spare parts. This year we were also
awarded the contract by the UK MoD to refurbish 700 final drive
transmissions for the CVR(T) Mark 1. The work undertaken will
include stripping, inspecting and manufacturing replacement
components, including the main rotational components of the
unit, before reassembly and testing. Deliveries commenced
in the summer of 2019, with the refurbishment programme
expected to be completed over the next two years.
Outlook
We remain confident in the continued and sustained growth
of Ricardo Performance Products. This is underpinned by the
segment’s strong order book and pipeline of opportunities
for new assembly and manufacturing programmes, several of
which include aftermarket opportunities.
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Ricardo Defense technicians installing ABS brake kits to
the Humvee ambulance to improve braking performance,
vehicle stability and occupant safety
Creating a world fit for the future 27
Mark Garrett – Chief Operating Officer
Research and Development
Continued R&D investment supports Ricardo’s growth and business diversification strategy. We
evaluate the benefit to our clients of our latest innovations, focusing on delivering technology
aligned with enduring market drivers. We understand the needs of our clients and provide
solutions, both to create opportunities and to help those customers succeed in a world where
the megatrends of today are shaping the global economy of tomorrow.
Global megatrends, among them rapid urbanisation, air
quality and climate change, energy security and sustainability,
connectivity and intelligent devices, global stability and natural
resource scarcity, are changing the way in which cities, countries
and economies interact both domestically and internationally.
The research initiatives and investment to develop solutions by
Ricardo’s dedicated Innovations division directly address these
key market drivers and are fully aligned with the Group’s strategy
as set out on page 12.
The following sections highlight key research and
development projects through which Ricardo Innovations is
managing to find solutions to the some of the macro issues
described above – issues that are faced by both governments
and industry alike.
Air quality and climate change
DownToTen: Measuring exhaust particles down to 10nm
Current legislated measurement of particle number (‘PN’)
emissions from vehicles addresses particle sizes greater than 23
nanometres (‘nm’). As a consequence, particle filters that virtually
eliminate the larger carbon soot particles from exhaust emissions
are now fitted to many vehicles. There is minimal understanding,
however, of how particles in the sub-23nm region can affect
human health and the environment.
28 Ricardo plc Annual Report & Accounts 2018/19
DownToTen will help measure the emissions and standardise
the measurement process for particle emissions in the
sub-23nm range, so that regulators, original equipment
manufacturers (‘OEMs’) and other manufacturers will have a
set of comprehensive measurements and tools to assist future
developments.
The final objective of the project is a Particle Number-Portable
Emissions Measurement System (‘PN-PEMS’) demonstrator for
highly effective determination of PN emissions from vehicles in
real-world operation.
CryoPower: Heavy-duty power with near-zero emissions
Dolphin N2, an entity which is independent of Ricardo, was
launched last year to further commercialise and technically
develop the intellectual property arising from over a decade of
research into near-zero emissions technology.
The revolutionary split-cycle engine reduces CO2 output
by 30% and potentially eliminates NOX and soot emissions
altogether. Known as CryoPower, the engine achieves this
by injecting liquid nitrogen during the combustion process,
achieving superior thermodynamic performance.
In addition to demonstrating the potential of CryoPower, the
team has also developed a simplified engine concept known
as ThermoPower. This concept uses the same basic engine
architecture as CryoPower but without the use of liquid nitrogen.
ThermoPower is particularly suited to packaging-sensitive
vehicle applications and represents a lower cost, more readily
adoptable solution. It achieves over 50% thermal efficiency,
which is equivalent to a fuel economy improvement of 15% in
comparison with the best current heavy-duty engines, whilst
retaining the low-emissions potential of CryoPower.
Energy security and sustainability
PowerDrive Line: Ultra-fast advanced battery charging
Delivering improvements in battery technology is a fundamental
requirement to enable the electrification of vehicles and to
satisfy consumer demands on price, range and charging time.
The PowerDrive Line team is exploring innovative solid-state
battery technology to improve cell safety, but without sacrificing
calendar and cycle life or energy and power density. This
technology will also facilitate ultra-fast charging, enabling any
hybrid or electric vehicle to be charged in as little as 15 minutes.
Our focus is on enabling fast-charge capability through
effective thermal management strategies, materials selection
and high-voltage electronics, whilst further developing our
Battery Management Systems (‘BMS’) technology.
HIFI-ELEMENTS: Accelerating battery pack development
Vehicles and their sub-systems are complex, and their
development requires expertise from many different domains
of science and technology. For any given functionality, OEMs
require a reduction in the cost and time it takes to bring a product
to market. Concurrently, legislators and consumers demand an
improvement in energy efficiency, safety and comfort.
The overall goal of the HIFI-ELEMENTS project is to provide
OEMs and suppliers of electric vehicle technologies with the
following:
• A standardised functional model interface with specifications
for various e-drive components;
• A standardised metadata model for third-party electric vehicle
development;
• A reduction of more than 50% in development and testing
time with new streamlined workflows;
• A near ten-fold Increase in validation test coverage with these
newly developed workflows; and
• A reduction of up to 20% in vehicle energy consumption from
early system-level optimisation.
Research and Development
Connectivity and intelligent devices
5StarS: Cyber security assurance framework
5StarS addresses the increased threat from cyber attacks linked
to the proliferation of connected and autonomous road vehicles.
The consortium of UK automotive and research companies
will develop a 5-star consumer rating framework, analogous to
that of the existing European New Car Assessment Programme
(‘NCAP’) vehicle safety ratings, but for vehicle cyber security. This
will provide consumers with a transparent and clear grading
of the cyber security of a vehicle, enabling manufacturers to
maximise return on their investment in their cyber-secure
systems.
Tools developed through the 5StarS vehicle vulnerability
assessment are enabling customers to secure connected vehicle
systems as part of our Digital Resilience collaboration with Roke.
Ricardo launched a new Digital Resilience
Lab with Roke in September 2018, enabling
controlled cyber security testing via wired
and wireless connections
Ricardo plc Annual Report & Accounts 2018/19 29
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Ian Gibson – Chief Financial Officer
Financial review
The Group has generated revenue and underlying profit before tax in line with the prior year, with mixed
performance across our constituent businesses. Within Technical Consulting, our Automotive businesses
in Europe and the US continued to be significantly impacted by challenging market conditions, causing a
reduction in revenue and operating profit. Our Rail business has also seen a reduction in order volumes in
Europe and Asia. These challenges have been largely offset by a combination of excellent growth in our
Energy & Environment business, as well as in Performance Products.
The successful acquisition of Transport Engineering in May 2019 contributed £0.3m to the Group’s
underlying profit before tax of £37.0m and £30m to the Group’s year-end order book of £314m. Net debt
has increased to £47.4m, which reflects the Transport Engineering acquisition.
GROUP RESULTS
The Group’s headline financial results are presented on
page 5. The Group’s overall order intake reduced by 7% to
£386m in the year. In Technical Consulting, this reflects a
combination of large multi-year programmes won in the prior
year, and lower orders in both Automotive and Rail this year.
In Performance Products, order intake increased through a
combination of growth in McLaren engine volumes and orders
for ABS brake kits. The closing order book was £314m, which
includes £30m from Transport Engineering (‘TE’), subsequently
renamed Ricardo Rail Australia, a Sydney-based technical rail
services provider acquired on 31 May 2019. The performance of
TE has been reported in the Technical Consulting segment.
Reported Group revenue increased by 2% to £384.4m
(FY 2017/18: £378.5m(*)). Organic revenue increased by 1%, after
normalising for the impact of the acquisitions of TE in the current
year and Control Point Corporation (‘CPC’) in September 2017 of
the prior year. Underlying operating profit, which excludes net
finance costs and specific adjusting items, as set out in more
detail in Note 4 to the financial statements, was in line with the
prior year at £39.6m (FY 2017/18: £39.7m(*)), with an underlying
operating profit margin of 10.3% (FY 2017/18: 10.5%(*)).
Underlying profit before tax was down 1% to £37.0m
(FY 2017/18: £37.5m(*)). On an organic underlying basis, operating
profit and profit before tax reduced by 2% and 3%, respectively.
On a reported basis, FY 2018/19 operating profit was £29.1m
(FY 2017/18: £29.2m(*)) and profit before tax was £26.5m
(FY 2017/18: £27.0m(*)), both in line with the prior year. This
includes specific adjusting items of £10.5m (FY 2017/18: £10.5m),
which comprise amortisation of acquired intangible assets
of £4.0m (FY 2017/18: £4.3m), acquisition-related expenditure
of £1.8m (FY 2017/18: £1.4m) and reorganisation costs of £3.4m
30 Ricardo plc Annual Report & Accounts 2018/19
Headline trading performance
FY 2018/19 (£m)
Less: Transport Engineering(1) (£m)
Organic FY 2018/19 (£m)
FY 2017/18(*) (£m)
Add: Control Point Corporation(2) (£m)
Organic FY 2017/18 (£m)
Growth (%)
Organic growth(3) (%)
Constant currency organic growth(4) (%)
Financial review
Underlying
Reported
revenue
Operating
profit
Profit before
tax
Reported
profit before
tax
384.4
(1.4)
383.0
378.5
2.2
380.7
2
1
-
39.6
(0.3)
39.3
39.7
0.2
39.9
-
(2)
(2)
37.0
(0.3)
36.7
37.5
0.2
37.7
(1)
(3)
(3)
26.5
(0.3)
26.2
27.0
0.2
27.2
(2)
(4)
(4)
(FY 2017/18: £4.8m) primarily in respect of the continued
restructuring of the Automotive business. The reduction in
reorganisation costs has been predominantly offset by the
impact of equalisation of Guaranteed Minimum Pensions
(‘GMP’) of £1.3m.
Closing net debt increased to £47.4m (FY 2017/18: £26.1m),
after £21.2m of cash consideration paid in respect of the TE
acquisition (£18.9m net of cash acquired), £3.5m of acquisition-
related payments, which includes deal costs, earn-outs and
retention payments in respect of the CPC acquisition in the prior
year, and a £2.5m net cash outflow from restructuring activities.
Net working capital increased by £7.3m in the year, primarily due
to the ramp up in the ABS brake kits programme.
SEGMENTAL RESULTS
The segmental results for the Group’s operating segments are as
follows:
Reported revenue
FY 2018/19 (£m)
Less: Transport Engineering(1) (£m)
Organic FY 2018/19 (£m)
FY 2017/18(*) (£m)
Add: Control Point Corporation(2) (£m)
Organic FY 2017/18 (£m)
Growth (%)
Organic growth(3) (%)
Underlying operating profit
FY 2018/19 (£m)
Less: Transport Engineering(1) (£m)
Organic FY 2018/19 (£m)
FY 2017/18(*) (£m)
Add: Control Point Corporation(2) (£m)
Organic FY 2017/18 (£m)
Growth (%)
Organic growth(3) (%)
Technical
Consulting
Performance
Products
270.5
(1.4)
269.1
286.8
2.2
289.0
(6)
(7)
113.9
-
113.9
91.7
-
91.7
24
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Technical
Consulting
Performance
Products
27.7
(0.3)
27.4
30.4
0.2
30.6
(9)
(10)
11.9
-
11.9
9.3
-
9.3
28
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Total
384.4
(1.4)
383.0
378.5
2.2
380.7
2
1
Total
39.6
(0.3)
39.3
39.7
0.2
39.9
-
(2)
(*) Comparative financial information has been restated for the transitional impact of adopting IFRS 15 Revenue from Contracts with Customers from 1 July 2018 and is presented on a like-for-like basis
with FY 2018/19. The impact of the restatement is set out in Note 38(a) to the financial statements on pages 170 and 171.
(1) The organic result for the year excludes the performance of acquisitions in the year on a like-for-like basis with FY 2017/18. TE was acquired on 31 May 2019. Excluding TE, revenue for FY 2018/19
would have been £1.4m lower. Underlying operating profit and profit before tax for FY 2018/19 would both have been £0.3m lower.
(2) The organic result for the prior year includes the performance of acquisitions in the prior year on a like-for-like basis with FY 2018/19. CPC was acquired on 8 September 2017. Had CPC been acquired
and consolidated from 1 July 2017 such that results for FY 2017/18 were on a like-for-like basis with FY 2018/19, revenue for FY 2017/18 would have been £2.2m higher. Underlying operating profit and
profit before tax for FY 2017/18 would both have been £0.2m higher.
(3) Organic growth is calculated as the growth in the result for the year compared to the organic result for the prior year and provides an indication of growth on a like-for-like basis with the prior year.
(4) Constant currency organic growth is calculated by reference to the result for the year retranslated using prior year foreign exchange rates and provides an indication of growth on a like-for-like basis
with the prior year, excluding the impact of foreign exchange.
Creating a world fit for the future 31
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Financial review
Technical Consulting results
Segmental operating results for Technical Consulting are
also discussed on pages 20 and 21. Technical Consulting
delivered revenue and underlying operating profit of £270.5m
(FY 2017/18: £286.8m(*)) and £27.7m (FY 2017/18: £30.4m(*)),
respectively. After normalising for the impact of the acquisitions
of TE in FY 2018/19 and CPC in FY 2017/18, organic underlying
operating profit reduced by 10% to £27.4m (FY 2017/18: £30.6m(*)).
Ricardo Energy & Environment performed strongly, with
increased order intake and operating profit compared to the
prior year. It has won increased levels of work internationally,
particularly in Australia, with prospects in this region looking
even better following the post year-end acquisition in July
2019 of PLC Consulting (‘PLCC’), subsequently renamed Ricardo
Energy Environment and Planning, a Melbourne-based planning,
environmental and infrastructure consultancy.
It was a mixed year for Ricardo Rail. The business was
impacted by lower volumes in Europe and Asia, resulting in
a small decline in organic underlying profit. However, the
successful acquisition of TE in May 2019 made an immediate
impact, offsetting the organic decline and adding breadth and
depth to Ricardo Rail’s existing capabilities.
Our European Automotive business suffered from significantly
lower order intake and revenue in the year, as a result of the
continued uncertain market and difficult trading conditions.
The impact on profitability was marked, but we took quick
restructuring actions, including headcount reductions in the UK,
which mitigated the effect on the business.
Our US Automotive business ended the year with an increased
loss compared to the prior year, as results did not improve in the
second half of the year as anticipated. The business continues
to focus on new-energy vehicle opportunities and realigning its
cost base in order to reduce losses and reposition itself as a more
lean and agile consulting operation.
We saw a good performance in Automotive in China, which
has led to further revenue and profit growth in the year. The
order book and pipeline of opportunities remain strong,
although we did see some evidence of a slowdown in orders
towards the end of the financial year.
The Defence Consulting business performed well, with its
increased order intake driven by strong customer relationships in
the US market.
Our Strategic Consulting business delivered growth in line
with expectations.
Performance Products results
Segmental operating results for Performance Products are also
discussed on page 26. Performance Products had an excellent
year, increasing revenue and underlying operating profit by
24% to £113.9m (FY 2017/18: £91.7m) and 28% to £11.9m
(FY 2017/18: £9.3m) respectively on the prior year.
The performance for the year was driven by increased
volumes of engines for McLaren and the ABS brake kits
programme for the US Army, with deliveries ramping up
throughout the year in line with our expectations. Growth in
these programmes has been complemented by the award
of the UK MoD Combat Vehicle Reconnaissance (Tracked)
(‘CVR(T)’) programme, and the Bugatti and Porsche transmission
programmes, as well as growth in new software licence sales.
(*) Comparative financial information has been restated for the transitional impact of adopting IFRS 15 Revenue from Contracts with Customers from 1 July 2018 and is presented on a like-for-like basis with
FY 2018/19. The impact of the restatement is set out in Note 38(a) to the financial statements on pages 170 and 171.
32 Ricardo plc Annual Report & Accounts 2018/19
Basis of preparation
The financial statements have been prepared in accordance
with International Financial Reporting Standards (‘IFRS’) and
International Financial Reporting Standards Interpretations
Committee (‘IFRS IC’) interpretations adopted by the European
Union (‘EU’) and the Companies Act 2006 applicable to
companies reporting under IFRS. The Group’s principal
accounting policies are detailed in Note 1 to the financial
statements on pages 128 to 136. Those accounting policies that
have been identified as being particularly sensitive to complex
or subjective judgements or estimates are disclosed in Note 1(c)
to the financial statements on pages 129 and 130.
New accounting standards
The Group adopted both IFRS 9 Financial Instruments and
IFRS 15 Revenue from Contracts with Customers as of 1 July 2018.
The full retrospective method of transition was adopted for
IFRS 15, resulting in a restatement of comparative financial
information. The net-of-tax reduction to retained earnings as of
1 July 2017 was £4.5m, with a further reduction in FY 2017/18 of
£1.2m. The net-of-tax-reduction to retained earnings due to
IFRS 9 as of 1 July 2018 was £2.7m. Further detail is set out in
Notes 38(a) and 38(b) to the financial statements respectively.
We have completed our work to assess the potential impact
of IFRS 16 Leases, which becomes effective to the Group for the
year commencing 1 July 2019. As set out in more detail in Note
1(x) to the financial statements, the expected transitional impact
from the application of IFRS 16 is a reduction to opening reserves
as at 1 July 2019 of approximately £5.0m. A reduction to profit
before tax for the year ending 30 June 2020 of up to £1.0m is also
expected, based on the Group’s portfolio of lease contracts as at
30 June 2019.
Acquisitions and acquired intangible assets
As set out in more detail in Note 12(a) to the financial statements,
the Group acquired the entire issued share capital of TE on
31 May 2019 for an initial cash consideration of £21.2m
(AUD 38.6m) with a further payment made in August 2019
of £0.5m (AUD 0.9m) to adjust for cash and normalised levels
of net working capital. There is fair value of contingent cash
consideration of £5.1m (AUD 9.4m), based upon an initial
probability-weighted assessment of expected earn-out
payments dependent on TE achieving certain post-acquisition
financial performance targets. The maximum cash outflow that
could be required to acquire TE is £29.9m (AUD 54.5m).
This investment added provisional goodwill of £17.9m
(AUD 32.7m) to the Ricardo Rail cash-generating unit and
provisional acquired intangible assets of £9.7m (AUD 17.8m),
which have a net book value at year-end of £9.5m (AUD 17.5m).
The amortisation of these for the post-acquisition period in the
financial year of £0.2m (AUD 0.3m) has been charged to the
income statement as a specific adjusting item, together with
£0.5m of expenditure incurred in relation to the TE acquisition.
A preliminary exercise to assess the fair value of the identifiable
net assets of TE commenced during the year and will be finalised
by the end of the next financial year. The provisional assessment
of identifiable net assets acquired is £8.9m (AUD 16.1m).
Financial review
Specific adjusting items
As set out in more detail in Note 4 to the financial statements,
the Group’s underlying profit before tax for the year excludes
costs incurred during the year that have been charged to
the income statement as specific adjusting items of £10.5m
(FY 2017/18: £10.5m), comprised of amortisation of acquired
intangible assets of £4.0m (FY 2017/18: £4.3m), acquisition-related
expenditure of £1.8m (FY 2017/18: £1.4m), reorganisation costs of
£3.4m (FY 2017/18: £4.8m) and GMP equalisation costs of £1.3m.
The acquisition-related expenditure of £1.8m included £0.5m
of fees to acquire TE, with £0.3m related to the remaining
cost incurred on a pro rata basis for the retention of specific
individuals as part of the CPC acquisition in the prior year. Fees
of £0.2m were also incurred to complete the post year-end
acquisition of PLCC, as set out in more detail in Note 39(a) to
the financial statements on page 173. The remainder primarily
related to the costs of running an M&A function, together with
fees incurred on aborted acquisition processes. Of the fees
incurred, £0.8m remained unpaid at the year-end.
The Group largely completed its restructuring of the European
Automotive business during the year, which resulted in £2.3m
of redundancy-related and dual running costs in the UK and
Prague, together with costs in relation to onerous contracts
of £0.3m as well as contractor and professional costs of £0.3m.
These costs were paid for during the year, together with £1.6m
of redundancy costs accrued at the end of the prior year in
relation to the downsizing of the Group’s operations in Germany.
Remaining proceeds of £2.5m, held in escrow at the end of
FY 2017/18 for the sale of the Schechingen Technical Centre in
Germany, were received as expected in July 2018. In addition,
£0.5m of redundancy costs were incurred in restructuring the
Rail business in the Netherlands in a planned response to a
reduction in volumes with its largest customer.
Following a court ruling in October 2018, companies are now
required to equalise pension benefits to address inequalities
in the calculations of GMP between men and women.
This has resulted in a charge of £1.3m for an increase in the
Group’s pension liabilities, given the non-recurring nature and
significance of the amount.
Research and Development
The Group continues to invest in R&D and spent £13.4m
(FY 2017/18: £9.5m) before government grant income of £2.2m
(FY 2017/18: £1.6m). Costs capitalised this year in accordance with
IFRS were £7.6m (FY 2017/18: £5.1m), reflecting our continued
investment in developers in our Software business, together
with new technology, tools and processes in our European
Automotive and Energy & Environment businesses. An overview
of current R&D activities is presented on pages 28 and 29.
The total Research and Development Expenditure Credit
(‘RDEC’) recognised in the current year is £7.1m (FY 2017/18: £8.0m).
This comprised an estimated RDEC credit in respect of the
current year of £6.9m (FY 2017/18: £6.9m), together with £0.2m
(FY 2017/18: £1.1m) arising from the routine amendment of
open applications as a result of further analysis of the qualifying
expenditure incurred.
Creating a world fit for the future 33
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Financial review
Net finance costs
Finance income was £0.5m (FY 2017/18: £0.4m) and finance costs
were £3.1m (FY 2017/18: £2.6m) for the year, giving net finance
costs of £2.6m (FY 2017/18: £2.2m). The increase was primarily
due to a higher non-utilisation fee charged on the £150m
borrowing facility in place throughout the year, compared to
the £75m facility that was in place throughout the prior year,
together with the impact of increased borrowings to finance the
acquisition of TE and other capital investments.
Taxation
The total tax charge for the year was £6.6m (FY 2017/18: £9.3m(*))
and the total effective tax rate reduced to a more normal
level for the Group of 24.9% (FY 2017/18: 34.4%(*)). Last year’s
effective tax rate increased substantially, primarily due to the
one-off derecognition of a remaining net deferred tax asset of
£2.2m (EUR 2.5m) as part of the restructuring of our activities in
Germany, which was completed that year.
The underlying effective tax rate for the year was 22.2%
(FY 2017/18: 21.3%(*)).
Deferred tax assets of £6.7m (FY 2017/18: £8.9m(*)) include
£4.9m (USD 6.3m) (FY 2017/18: £5.5m (USD 7.2m)) of R&D tax
credits in the US which continue to be recognised and have
partially been utilised during the year. The Directors have
considered the recoverability of these assets and remain satisfied
that it is probable that sufficient taxable profits will be generated
in the foreseeable future, against which the recognised assets
can be utilised.
Earnings per share
Basic earnings per share increased by 12% to 37.1p
(FY 2017/18: 33.0p(*)). The Directors consider that underlying
earnings per share provides a more useful indication of
underlying performance and trends over time. Underlying basic
earnings per share for the year decreased by 3% to 53.7p
(FY 2017/18: 55.1p(*)).
Basic earnings per share, with a reconciliation to an underlying
basic earnings per share, which excludes the net-of-tax impact
of specific adjusting items, is disclosed in Note 10 to the financial
statements on page 142.
Dividend
As set out in Note 11 to the financial statements on page 142,
the total dividend for the year has increased by 4% to 21.28p per
ordinary share (FY 2017/18: 20.46p) and amounts to £11.4m
(FY 2017/18: £10.9m), reflecting the Board’s continued confidence
in the prospects of the Group. The proposed final dividend of
15.28p (FY 2017/18: 14.71p) will be paid on 21 November 2019 to
shareholders who are on the register of members at the close of
business on 8 November 2019, subject to approval at the Annual
General Meeting on 14 November 2019.
Capital investment
Cash spend on property, plant and equipment was £7.6m
(FY 2017/18: £7.7m) as we continue to invest in our business
operations. This spend included new and upgraded test
cell equipment, machinery and IT hardware, together with
refurbishments of existing office spaces.
(*) Comparative financial information has been restated for the transitional impact of adopting IFRS 15 Revenue from Contracts with Customers from 1 July 2018 and is presented on a like-for-like basis with
FY 2018/19. The impact of the restatement is set out in Note 38(a) to the financial statements on pages 170 and 171.
34 Ricardo plc Annual Report & Accounts 2018/19
Financial review
Banking facilities
At the end of the year, the Group held total banking facilities
of £166.4m (FY 2017/18: £90.9m), which included committed
facilities of £150.0m (FY 2017/18: £75.0m). The committed
banking facility consists of a £150m multi-currency Revolving
Credit Facility (‘RCF’) which provides the Group with committed
funding through to July 2023. In addition, the Group has
uncommitted facilities including overdrafts of £16.4m
(FY 2017/18: £15.9m), which mature throughout this and the next
financial year and are renewable annually.
Committed banking facilities of £79.1m (FY 2017/18: £49.8m),
net of direct issue costs, were drawn primarily to fund
acquisitions and for general corporate purposes. These are
denominated in Pounds Sterling and have variable rates of
interest dependent upon the Group’s adjusted leverage, which
range from 1.4% to 2.2% (FY 2017/18: 1.6% to 2.6%) above LIBOR.
Foreign exchange
On consolidation, revenue and costs are translated at the
average exchange rates for the year. The Group is exposed to
movements in the Pound Sterling exchange rate, principally
from work carried out with customers that transact in Euros, US
Dollars and Chinese Renminbi. Compared to the prior year, the
average value of the Pound Sterling weakened by 4.0% against
the US Dollar, but strengthened by 0.5% against the Euro and
0.7% against the Chinese Renminbi.
At the prestigious Vienna Motor
Symposium in May 2019, Ricardo
unveiled its advanced immersive Virtual
Reality app enabling collaborative
simultaneous engineering design
reviews to be carried out by multiple
users in different geographical locations
During the year the Group commenced a process to
Had the results for the year been stated at exchange rates
market the Detroit Technical Center (‘DTC’) test cell assets for
sale. After the year-end on 21 August 2019, we purchased
the freehold property at DTC for £14.2m (USD 17.3m) and
immediately marketed it for sale, together with the DTC test
cell assets. This is set out in Notes 19 and 39(b) to the financial
statements on pages 151 and 173 respectively.
These activities will have the dual effect of removing the US
Automotive business from its long-term lease commitment
and provide the ability to realign its cost base with its strategy
as a more operationally efficient consultancy.
Net debt
Closing net debt was £47.4m (FY 2017/18: £26.1m). The Group
had a net cash outflow for the year of £21.3m (FY 2017/18: £11.8m),
after consideration paid in respect of acquisitions of £21.2m
(£18.9m net of cash acquired) (FY 2017/18: £4.6m), acquisition-
related payments of £3.5m (FY 2017/18: £1.7m), and a net cash
outflow from restructuring activities of £2.5m
(FY 2017/18: £2.3m inflow). Our restructuring of the Automotive
business has been broadly cash neutral over the last two
financial years, with the FY 2017/18 net cash inflow of £2.3m
offset by an outflow of £2.0m in FY 2018/19. An additional
£0.5m was spent in FY 2018/19 on restructuring the Rail
business in the Netherlands.
The composition of net debt is defined in Note 33 to the
financial statements on page 166.
Net working capital increased by £7.3m in FY 2018/19, arising
from higher trade receivables and inventory requirements,
primarily due to the ramp up in the ABS brake kits programme.
consistent with those of the prior year, revenue would have been
£2.6m lower and underlying profit before tax and reported profit
before tax would both have been £0.1m lower.
Pensions
The Group’s defined benefit pension scheme operates within
the UK. The fair value of the scheme’s assets at the end of the
year was £137.5m (FY 2017/18: £131.0m). The accounting deficit
measured in accordance with IAS 19 Employee Benefits was
£8.5m before tax (FY 2017/18: £4.6m), or £7.1m after tax
(FY 2017/18: £3.8m).
The £3.9m increase in the pre-tax pension accounting deficit
during the year was due to £15.8m from changes in financial and
demographic assumptions, £1.3m of non-recurring past service
costs as a result of the High Court’s ruling on GMP equalisation
and £0.1m of net finance costs. These adverse movements were
partially offset by a £7.9m return on plan assets, £4.3m of cash
contributions paid to the scheme and a £1.1m reduction in
liabilities arising from the take-up of member option exercises
during the year.
Ricardo has committed to continue to fund the pension deficit
and increased its contributions to £4.6m per annum from
1 July 2019 until 31 July 2022.
Creating a world fit for the future 35
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Gender diversity as at 30 June 2019
Our people
11%
7
22%
630
33%
3
9
Board members(*)
65
Senior leaders
2,828
All employees(*)
6
67%
58
89%
2,198
78%
(*) Includes Company Secretary
Male
Female
(*) Excludes contractors
We spend decades of our lifetime in a workplace – far too much
time to spend on ’just a job’. At Ricardo, we want every one of
our employees to be inspired by our mission to create a world
fit for the future. We are committed to safety and sustainability
in mobility and energy generation, whilst also protecting scarce
natural resources as well as fully embracing and promoting
opportunities for new and innovative transportation technologies.
We want our people to know that their work is worthwhile and to
be clear about their personal contribution and prospects on our
exciting journey.
In order to provide the best possible work experience, Ricardo
aims to give every employee the opportunity to be their best
and play to their strengths every day. We promote a diverse and
inclusive culture in how we recruit and recognise individuals,
and we endeavour to offer the right career opportunity for
all – women and men, consultants, engineers, scientists and
support staff – valuing a specialist contribution as much as a
management role. From the moment they start with us, we
encourage our employees to engage actively in their own career
development by stretching their wings, broadening their horizons
and experience, and deepening their knowledge. In addition to
any formal training, this might be through taking part in one of
our various internal strategic or improvement-oriented projects,
working on a customer project at a different technical centre or at
a customer location, or by going on an international assignment.
We are particularly passionate about growing and nurturing
our talent base. Continuous effort goes into the improvement
of our apprentice and graduate schemes. In Ricardo Automotive
and Ricardo Rail, our established international graduate schemes
provide an exciting mix of learning on-the-job as part of real-
life customer projects, classroom training for technical and
interpersonal skills, and international exposure through our
graduate exchange programmes. In the UK, we are also running
a variety of apprenticeship programmes across all divisions: this
mirrors the UK Government’s push for more apprentice positions
through the apprenticeship levy introduced in April 2017. In close
collaboration with the relevant universities, new courses are about
to be implemented which support the further development of
apprentice programmes under the umbrella of the levy.
36 Ricardo plc Annual Report & Accounts 2018/19
OUR PEOPLE
Evgeniy Shapiro
VECTIS Development Manager
Ricardo Software
From its first release in 1992, Ricardo’s VECTIS
Computational Fluid Dynamics suite has been at the
leading edge of modelling science, contributing to
virtual product development both within Ricardo and
throughout our worldwide customer base.
The challenges being faced by the global automotive
industry to reduce emissions and improve energy
efficiency demand ever higher accuracy and
robustness of simulation software. In my role as VECTIS
Development Manager, my aim is to help develop
innovative computational tools and methodologies that
deliver predictive analysis capability across the diverse
range of applications of VECTIS. In this way, my team
helps our software users and customers to create the
more efficient products of the future.
Our people
With our ambitious growth plans, key tasks of our human
resource agenda are international recruitment and the ability
of staff to move around the globe for work. In this regard we
continue to closely monitor the impact of Brexit and the ongoing
uncertainty around the movement of staff between the UK and
the European Union. We are an employer of choice for top-level
science and engineering opportunities – as evidenced by the
number of applications received from highly rated schools,
colleges and universities around the world – and we offer technical
and non-technical graduate and apprenticeship roles as well.
Our recruitment processes and employee value proposition
are under continuous review to ensure that we attract not only
highly qualified engineers and scientists, but also a broader
and more diverse range of consultants and professionally
qualified candidates from fields such as finance, human resource
management, risk management and marketing.
The emphasis on recruitment and employer branding is also
driven by a change in employee movements. We saw a similar
attrition rate to the prior year, in line with our expectations of
the employment market: experienced consultants, engineers
and scientists are highly sought after in all our industries and
all companies are trying to respond to the changing way in
which work is viewed. One trend revolves around having shorter
employment periods and changing work patterns. A further
factor was a focused review aimed at ensuring our divisions are
structured correctly for the current business environment, and in
some cases there was a necessity for redundancies.
We want all our employees to be happy and engaged
throughout their time with us – in terms of the culture of the
organisation, their ongoing personal development as well as
competitive remuneration and benefits packages – and we work
very hard to achieve this. During the year we have also enhanced
our well-being programme to improve the support we offer to our
employees in respect of mental and physical welfare.
Like most businesses we are learning to adapt to a faster-moving
employment market where a person’s career will no longer be in
just one or two companies. Our recruitment is therefore fast, cost-
efficient and flexible, and we place a lot of emphasis on a positive
leavers’ experience as we regard every ex-employee as a possible
customer and promoter of our business. We also see an increasing
number of former employees returning to Ricardo, which is a
positive result of these efforts.
Ricardo fosters a culture that not only promotes excellence but
also diversity and inclusion. We continue to concentrate our efforts
on promoting female career advancement, especially in science
and engineering roles. This includes hiring female apprentices,
graduates and professionals, and challenging any implicit bias in
the recruitment and promotion processes. Our employer branding,
fresh on-boarding process and new mentoring programme
received very good feedback, and are all designed to be more
appealing to, and supportive of, women.
The gender pay report, which large UK companies are now
obliged to publish on an annual basis, has been submitted for the
second time. We are pleased to report that our efforts have borne
tangible results and show an improvement in the gender pay
gap, as well as an increase in female representation. Details can be
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OUR PEOPLE
Rob Simmonds
Programme Manager
Ricardo Performance Products
As a programme manager for Ricardo Performance
Products, I am responsible for the successful delivery
of transmission and driveline projects that meet the
exacting requirements of our global and high-end
motorsport client base. Over recent years, I have been
responsible for programmes including the four-wheel
drive systems of M-Sport’s 2017 and 2018 World Rally
Championship winning Ford Fiesta WRC and the
transmission of the M-Sport Bentley GT3.
This is an industry in a state of rapid change, with
an increasing diversity of applications and OEM
motorsport programmes that are funded through
sales of the competition vehicle itself. As such, while
we continue to deliver the ultimate in competitive
performance, we also need to focus on the needs of the
consumer for reliability, extended service intervals and
ultimately, complete ease of ownership.
found in our public Gender Pay Gap Report on www.ricardo.com.
Our Chairman, Sir Terry Morgan, and Chief Executive Officer,
Dave Shemmans, are members of the 30% Club, a cross-sector
initiative of business leaders with the mission to support gender
diversity from entry level to executive positions, and with a target
to achieve 30% female representation across its members. This
target is shared by Ricardo, and demonstrates our commitment
to diversity at the highest echelons of our organisation.
Our reputation as an international leader in engineering,
technical, environmental and strategic consultancy is based
on the outstanding capabilities of our people. Every day our
employees impress us with their dedication and innovative
solutions. We hope to inspire them with our mission to create a
world fit for the future.
Creating a world fit for the future 37
Corporate responsibility and sustainability
Why it matters to Ricardo
Ricardo has a proactive and engaged approach to corporate
responsibility and sustainability. The environment is a key driver
for our strategy and this is seen in many of our activities, and
creating a world fit for the future provides the central focus
for all of our teams. This is embedded in what we do and the
solutions we deliver.
We have a strong connection with many of the United
Nations’ Sustainable Development Goals (‘SDGs’), published on
www.un.org/sustainabledevelopment. These connections link to
our value streams, our internal operations and our stakeholders,
particularly our communities.
Sustainable
Development Goal
Value streams
The way we operate
Stakeholders
• Emissions reduction (Automotive)
• Air quality and smart cities (Energy &
Environment)
• Provision of a safe working
environment, well-being
programmes and employee
benefits
• Governments and
local communities,
employees and their
families
• Ensuring a diverse range of experiences in
• Promoting gender equality at all
our delivery and leadership teams
levels in the business; reduction in
gender pay gap
• Clients, employees
and their families
• Water resource and management
• Monitoring water use on larger sites
• Clients, governments
planning
and local
communities
• Renewables, energy grids (Energy &
• Reducing energy consumption and
• Clients, governments
Environment)
• New vehicle technologies, sunlight to
traction (Innovations )
sourcing renewable energy in the UK;
• Use of virtual product development
(‘VPD’) tools in our project delivery,
needing fewer prototypes
and local
communities
• City environmental planning, waste and
resource planning (Energy & Environment)
• Efficient and innovative urban transport
systems (Rail and Automotive)
• Working in partnerships with local
communities around our larger
sites to reduce collective energy use
• Resource efficiency strategies and
• Reducing energy and resource use
advice, Life Cycle Assessment (Energy &
Environment)
• Clients, governments
and local
communities,
employees and their
families
• Clients, businesses,
governments and
local communities
• Greenhouse gas (‘GHG’) emissions
• GHG reporting and reducing
• Clients, governments
reduction (Automotive)
carbon footprint
• GHG inventories, climate change
mitigation and adaptation, climate
finance (Energy & Environment)
and local
communities
38 Ricardo plc Annual Report & Accounts 2018/19
United Nations’ Sustainable Development Goals web site:: www.un.org/sustainabledevelopment
Corporate responsibility and sustainability
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Edinburgh Trams was ‘Highly
Commended’ at the Global Light
Rail Awards 2019 for the successful
introduction of the SmartDrive system,
co-developed with Ricardo Rail
We rely on the innovation, talent, technical and
communication skills from our employees, and we invest in their
development for the benefit of all our stakeholders. Our values
and policies are designed to ensure that we and our suppliers
operate ethically, honestly and meet human rights obligations.
Ricardo’s employees are engaged as active members of the
communities in which most of our larger sites operate. There
is a strong focus on working to promote Science, Technology,
Engineering and Maths (‘STEM’) subjects in schools and colleges,
as this links directly to the next generation of consultants,
engineers, and scientists who will be the core of our future
value chain.
As a responsible employer, we seek to protect and care for our
employees by providing a safe and healthy work environment
and by minimising the environmental impact of our operations.
The environment – a strategic driver in action
The environment is at the heart of what we do and is embedded
in our strategy, as shown on page 12:
• Transport & Security activities are driven by worldwide trends
in climate change, emissions reduction and fuel economy
legislation;
• Energy activities are similarly driven by the need to provide
more sustainable and efficient solutions for power generation
from renewable and clean energy sources; and
• Scarce Natural Resources & Waste activities provide solutions
to improve air quality, reduce environmental impacts and
improve efficiency in the use of natural resources and waste
management.
We support these sectors with research and development
activities to enhance our capabilities. These are described on
pages 28 and 29.
Environmental thought leadership
With growing pressure to reduce negative impacts on
the environment and stem the effects of climate change,
Ricardo’s teams of multi-disciplinary environmental experts
continue to support governments and private sector
organisations around the world through their consultancy
and regular thought leadership.
Ricardo has continued to support the drive to reduce vehicle
emissions through increased electrification. This has included
our experts delivering a popular webinar series, bringing
together organisations from across industries to help them
gain better insight on how to transition to low carbon vehicles,
how to change fleets and to find new approaches to transport
operations and infrastructure.
Ricardo’s experts in sustainable transport and energy have also
provided key contributions to important industry papers. These
have included the UK Committee on Climate Change’s recent
independent guidance to the UK Government on achieving a
net zero carbon target by 2050, and the British Vehicle Rental and
Leasing Association’s (‘BVRLA’) Road to Zero paper.
Ricardo Energy & Environment supporting the C40 Climate Action Planning
(‘CAP’) Africa Programme in Ghana, focused on scenario planning for climate
change mitigation
Creating a world fit for the future 39
Corporate responsibility and sustainability
This year our climate finance and climate change experts
The very nature of Ricardo Energy & Environment’s
delivered the next phase of Ricardo’s contribution to the
Climate Finance Accelerator, an innovative international initiative
involving the UK Government and other international donors.
Experts from Ricardo supported a range of countries – including
Mexico, Columbia and Nigeria – in improving their readiness to
source and utilise funding to accelerate the implementation of
their climate change commitments.
consultancy work provides a further significant environmental
benefit: we work with businesses, governments and
international organisations to help find solutions to some of the
most pressing environmental challenges.
We have a comprehensive environmental consulting
capability which provides:
• Excellence in thought leadership around economic, societal
Ricardo’s team of chemical risk and crisis management experts
and environmental interactions;
has also been delivering a wide range of industry thought
leadership. It has focused on helping organisations from around
the world to better understand the complex global chemical
regulations and to enable them to deliver best practice in
chemical safety and management – directly helping to protect
company reputation, the environment, and to save lives.
Environmental benefits
Ricardo delivers many positive environmental outcomes
which are the result of the work we undertake in the Technical
Consulting business. These can be categorised as:
• Ricardo- and customer-funded engineering projects to
develop low-emission and high-efficiency technologies for
incorporation into products around the world;
• Lower carbon usage through the delivery of engineering
projects which lead to more efficient consumer products
being manufactured by our customers;
• Environmental consultancy, largely undertaken by Ricardo
Energy & Environment; and
• Improvements in operating efficiency carried out by Ricardo
Rail for rail operators and rolling stock manufacturers.
These products and services will have an impact on future levels
of emissions, waste, energy usage, water consumption and
noise across many of the sectors we serve. The cumulative
benefits of projects we complete each year save many multiples
of our operational carbon footprint over the life of the products
we engineer.
• Extensive understanding of the climate change challenges
facing organisations, including scarcity of natural resources,
strategic sustainability and energy management;
• Deep understanding of policy drivers, environmental strategy
and economics, providing insight and project delivery for
business and industry; and
• Modelling and data management to identify and realise value
for organisations.
Operational environmental impact and
greenhouse gas emissions
At Ricardo we are committed to keeping the environmental
impact of the Group’s facilities and activities to a minimum,
as well as ensuring that our services have positive impacts on
society. The Board’s commitment to this is embodied in our
environmental policy, which is available through our intranet
and to the public through our website, www.ricardo.com. The
drivers for this policy are as follows:
• Relevant Sustainable Development Goals;
• Delivering services that enable strategic improvements for our
customers and the end users of their products and services;
• The need for continuous improvement; and
• The desire to be responsible members of the local
communities in which Ricardo operates.
The impact of our operations, particularly testing and
manufacturing, are the largest contributors to our operational
carbon footprint and greenhouse gas (‘GHG’) emissions. Our
40 Ricardo plc Annual Report & Accounts 2018/19
Corporate responsibility and sustainability
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testing for customer- and research-funded programmes
primarily uses fuels and electrical energy; in addition, there is
energy required for heating some of our sites. The full effect of
the prior year sales of our Chicago and Schechingen test facilities
on the Group’s emissions has contributed to the improvement.
Our manufacturing energy use is predominantly power for
machine tools and assembly facilities and gas used in our heat
treatment plant. Our Scope 2 use is all electricity. We do not
currently measure our Scope 3 emissions, but have developed
methodologies to measure the most material Scope 3 emissions
in future years.
We comply with the Companies Act 2006 (Strategic and
Directors’ Report) Regulations 2013 on GHG emissions and have
stated our comparative history in our Strategic Performance on
page 19. As this requires the inclusion of fuels used in engine and
vehicle testing, variability in results year-on-year can be expected
due to the varied mix in types of test and engine size.
Projects to reduce energy consumption and manage waste
responsibly are actively encouraged and have become more
important as unit fuel costs increase; waste streams have also
become more significant as the manufacturing activities of our
Performance Products business have grown.
We focus our operational carbon footprint improvements on
underlying energy efficiency prior to the use of fuels for testing
which varies based on client requirements. We continue to use
tonnes of carbon dioxide equivalent (‘tCO2e’) per employee as
an intensity measure.
This year we also continued to calculate our market-based
Scope 2 emissions in the UK, as well as our location-based
emissions, which have been reported above using UK
Government and International Energy Agency (‘IEA’) factors in
Operational carbon footprint and GHG emissions
tCO2e ('000s)
Scope 1(*)
Scope 2
Total
FY 2018/19
4.1
6.4
10.5
FY 2017/18
8.6
8.9
17.5
FY 2016/17
8.1
10.2
18.3
tCO2e per employee
3.8
6.0
6.7
(*) The operational control test is applied to determine if an emission is within Scope 1.
accordance with the GHG Protocol’s Scope 2 guidance. Our UK
operations are our biggest consumer of electricity, where we
directly procure all electricity from renewable or zero-emissions
sources. This means that when using the market-based
approach which looks at actual energy generation sources, our
Scope 2 emissions are reduced by over 50%. Even so, we still
strive to continually reduce our underlying consumption via
efficiency improvements. We have seen significant reduction in
fuel and electricity use as a result of the sales of the Chicago and
Schechingen test facilities in the prior year. We have also seen
less fuel use in remaining automotive test facilities due to an
increased focus on smaller engines.
Other environmental impacts include waste streams, which
are monitored to identify potential improvement opportunities
and to ensure legislative compliance. Higher risk areas of
our facilities, such as fuel storage and distribution systems,
have containment and inspection regimes which meet local
legislative requirements.
Many of Ricardo’s customers require certification for their key
suppliers in respect of the environmental management system
standard, ISO 14001. We are accredited to this standard in the
Creating a world fit for the future 41
Corporate responsibility and sustainability
majority of our locations. The achievement of the standard
is defined by appropriate policies, processes and procedures
as part of the management system in each division. Many of
these are closely linked to both quality and health and safety
procedures.
The suite of ISO certifications and the supporting internal
and external audit programmes are used to check policy
effectiveness, share best practice, identify improvement
opportunities and ensure compliance. Staff training in health and
safety and environmental matters is a priority and is reviewed
annually as part of normal appraisal processes.
Governance – corporate responsibility
The Board reviews the key elements of corporate responsibility
on an annual basis. To underline the importance of integrity in
all relationships between employees and stakeholders, we have
ethics, fraud prevention and whistleblowing policies which
are communicated to all employees. A summary of these is
communicated externally through our Code of Conduct,
which includes the policy elements to meet our human
rights obligations.
Under our ethics policy we do not permit bribery, anti-
competitive or corrupt business practices in any dealings.
Under our fraud prevention policy, we do not allow intentional
acts by one or more individuals within the business to use
deception or theft to gain unjust or illegal advantage. Under
our whistleblowing policy, we provide a procedure for any
employee to raise any malpractice concerns in an appropriate
manner, with protection to the whistleblower. Ethics and
whistleblowing policies and reports are reviewed annually by
the Audit Committee.
Modern slavery
We continue to adhere to the requirements of the Modern
Slavery Act 2015 and have published an updated statement
for this financial year on our website. This subject is reviewed
annually by the Audit Committee.
Human rights
The Group firmly believes in the principles behind the Universal
Declaration of Human Rights. We support this by having a strong
commitment to compliance with laws and regulations in the
regions in which we operate, and by expecting the same from
our suppliers. We articulate this through our Values and Code of
Conduct, the relevant policy elements of which are:
• Being honest, ethical and above reproach with each other and
with our stakeholders in all our business dealings;
• Treating all others as we would like to be treated ourselves;
• Not engaging in activity that can be considered as trafficking
in persons, including the use of forced labour, child labour or
procurement of immoral services for the performance
of contracts;
• Not harassing or discriminating against any employee or job
applicant, either directly or indirectly;
• Encouraging all our employees to take an active role against
all forms of discrimination and harassment; and
42 Ricardo plc Annual Report & Accounts 2018/19
In July the R-Tour 2019, a 900-mile, 10-day charity cycle ride visiting all of
Ricardo’s UK sites, raised a total of £50,000 for Mind, a UK charity that works to
raise awareness and provide advice regarding mental health
• Employing or contracting with staff who are appropriately
vetted and have the proven right to work in the country of
employment for the type of work being undertaken.
The Group’s position on human rights is supported through a
number of ethics and employment policies which are designed
to ensure we conduct business in a legal and ethical manner at
all times.
Health and safety
Ricardo is committed to compliance with local health and safety
legislation, to a safe working environment and to a very low level
of reportable accidents. We support training in health and safety
internal audits and inspections, and we are now certified to ISO
45001 in our technical centres and larger offices in the US, the
UK, the Netherlands, Italy, the Czech Republic and China. Our
health and safety policy is available through our intranet and to
the public through our website.
We recognise the level of reportable accidents as a measure
of performance in health and safety. The number of reportable
accidents increased in this financial year, but the overall level
is still low and shows the continued success of our health and
safety policies. We continue to focus on reducing accidents
and near-misses as part of our commitment to continuous
improvement and loss prevention.
Health and safety
Reportable accidents(*)
FY
2018/19
2017/18
2016/17
2
1
3
(*) Based on current definitions of the Reporting of Injuries, Diseases and Dangerous Occurrences
Regulations (‘RIDDOR’)
Chief Executive Officer, Dave Shemmans, together with fellow volunteers at
the Midsummer Ball in June 2019, an evening that raised a total of £70,000 for
children's charities, including the Chestnut Tree House children’s hospice
Suppliers
Relations with our suppliers are essential in achieving client and
shareholder satisfaction. Our policy is that key suppliers should
be certified to ISO 9001, ISO 14001 and ISO 45001 standards, and
all suppliers are encouraged to obtain these certifications. Local
suppliers are used where commercially practical. There are no
significant supply contracts which are essential to the business of
the whole Group, and we are not reliant upon any suppliers that
would jeopardise the independence of the business.
Initiatives are managed by our Head of Global Procurement
and savings are delivered by consolidating the supply base
and reducing the total cost of doing business. We strongly
encourage our suppliers to comply with our Code of Conduct or
their own equivalent policies.
Ricardo employees supporting the local environment with its
annual waste and recycling activities at the Oxford science campus
Corporate responsibility and sustainability
Local communities
It is our policy and objective to make a positive contribution to
all regions and communities in which we operate, particularly
in education in areas local to our main sites. Many of the larger
Ricardo offices support local community activity and give
charitable donations, particularly where employees participate
in community or charitable fundraising activities. The focus
is on creating sustainable links and on improving the image
and understanding of the business and the engineering and
scientific professions in the community.
Community engagement in promoting Science, Technology,
Engineering and Maths (‘STEM’) subjects and diversity has
been a key part of our employee involvement. A wide range of
activities have been undertaken, namely:
• Partnerships with schools near our larger UK sites, supporting
curriculum delivery and teacher engagement in STEM;
• The automatic enrolment of many of our UK graduates as
STEM ambassadors when they join the business;
• Sponsorship of regional STEM events attended by over 14,000
students seeking career opportunities from many employers; and
• Support of university teaching from Ricardo Software with its
products – in 200 locations, across approximately 40 countries.
We also work with our local communities to provide business
input on economic regeneration, and we actively engage in
local partnerships, particularly in the area where our Shoreham
Technical Centre is located, where we are the largest private-
sector employer.
Donations
We often match staff donations to charitable activities,
particularly where there is active staff participation in events.
Financial contributions to charities in the financial year were
£43,710 (FY 2017/18: £36,237). The effectiveness of these policies
is informally measured by community feedback.
Ricardo plc Annual Report & Accounts 2018/19 43
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Risk management and internal control
The Board has overall accountability for ensuring that risk is
effectively managed across the Group. We consider that effective
risk management is critical to the achievement of Ricardo’s strategic
objectives and the long-term sustainable growth of our business.
Such systems are designed to manage, rather than eliminate, the
risk of failure to achieve Ricardo’s objectives and can only provide
reasonable assurance against material misstatement or loss.
Risks are reviewed by all business areas on a half-yearly basis and
measured against a defined set of likelihood and impact criteria.
Risks are measured both before and after the mitigating effect of the
application of compensating controls. This is captured and reported
consistently, enabling the risk information to be consolidated and
ranked. The key risks are then summarised in the Group’s risk profile
and submitted to the Board for review and approval.
As part of the bi-annual risk management process, Directors and
senior managers are required to certify that they have established
effective controls to manage risk and to comply with legislation, as
well as with the Group’s policies and procedures.
Ricardo’s internal control and monitoring procedures include:
• Clear and understood responsibilities by both line and financial
management for the maintenance of good financial controls and
the production of accurate and timely management information;
• Requirement for divisional Finance Directors to confirm on
a monthly basis that appropriate controls are in place and to
identify any exceptions, with the outcome being reviewed by
the Group Financial Controller and Group Risk Manager & Head
of Internal Audit;
• Divisional Finance Directors have line management responsibility
to their Managing Directors, but with an independent reporting
line to the Chief Financial Officer;
• Control of key financial risks through clearly set authorisation
levels and appropriate segregation of accounting duties;
• Control of key project risks through project delivery and review
systems;
• Control of other key business risks through a number of
processes and activities recorded in the Group’s risk register;
• Detailed monthly forecasting and reporting of trading results,
financial position and cash flow, with regular review by
management of variances from budget and forecast;
• Review and reporting by the internal audit function on divisional
compliance with internal procedures and financial controls; and
• Review and implementation of recommendations in reports on
internal control by external auditors.
To ensure our risk process drives continuous improvement across
the business, we monitor the ongoing status and progress of key
action plans against each risk on a half-yearly basis. Risk is a key
consideration in all strategic decisions made at Board level. In the
June 2019 risk review cycle, we considered risks associated with our
customers, suppliers, employees, finances and the potential impact
of Brexit, which we now report as a separate principal risk. Our
principal risks and the approach to their mitigation are disclosed on
pages 45 and 46.
44 Ricardo plc Annual Report & Accounts 2018/19
The Group has risk management processes in place for projects
and other business risks. Contract risks are managed through a
project management process which is closely linked to measurement
of financial performance. The majority of active Technical Consulting
projects are reviewed on a monthly basis within divisions. In addition,
the highest risk category projects are independently reviewed by
the Group either on a quarterly basis or once significant milestones
are deemed to have been achieved. Non-contract risks are owned
by the Group functions and divisional Managing Directors. These
non-contract risks are analysed, regularly reviewed and recorded
in the Group’s risk register in liaison with the Group Risk Manager &
Head of Internal Audit, who has an independent reporting line to
the Chairman of the Audit Committee. The Group’s approach to risk
management is to identify key risks early and to remove, control or
minimise the impact of them before they occur.
Risk transfer is managed through insurances by the Group Risk
Manager under the direction of the Chief Financial Officer. The
insurance programme is reviewed annually by the Board to ensure
that it continues to meet business needs as the risk profile changes.
Risk appetite is managed through a number of internal controls,
authority limits and insurance excesses. The Group’s risk appetite was
reviewed during the year as part of the Board’s review of risks and is
stated as an internal policy document.
The Group’s internal audit function provides assurances on
divisional systems of internal control, risk management and
compliance with applicable legislation and regulations. This is
complemented by internal audits required as part of maintaining
certifications to international standards for management systems.
The effectiveness of these risk management and internal audit
processes is reviewed annually by the Audit Committee and is set
out on pages 86 and 87.
Financial risks faced by the Group comprise capital risk, liquidity
risk, credit risk and market risk (comprising interest rate risk and
foreign exchange risk). The Group’s objectives, policies and strategies
in respect of these risks are set out in Note 23 to the financial
statements on pages 154 to 158.
The Company complies with the 2016 UK Corporate Governance
Code by ensuring that:
• Risks are either classified as strategic or operational and as either
internally or externally driven;
• Risks are evaluated on a gross and net risk basis; and
• The Chief Executive Officer reviews the higher-rated risks on the
Group’s risk register with the Audit Committee twice each year, in
the presence of the other Executive Directors and the Chairman.
We also ensure that emergent risks are considered as part of
the Board’s existing half-yearly reviews of risk and annual review
of strategy. This is compliant with the requirements of the 2018 UK
Corporate Governance Code, which becomes effective to the Group
from 1 July 2019.
Principal risks and uncertainties
In common with all businesses, the Group faces risks and
uncertainties on a daily basis. It is the effective management of
these risks that places us in a better position to be able to achieve
our strategic objectives and to embrace opportunities as they arise.
Set out below and on the following page are the details of the
Group’s principal risks, the mitigating activities in place to address
them, and the additional actions implemented to further reduce
the net risk to the Group. The mitigation of the principal risks is
within the Group’s risk appetite, which is reviewed annually by the
Audit Committee. It is also recognised that the Group is exposed
to a number of emergent risks that are currently deemed to be
less material, together with additional risks and uncertainties
beyond those listed that are presently not known to management
which may also have an adverse effect on the business.
Movement in risk
Reduced risk
No change
Increased risk
Principal risk
Impact
Mitigation
Customers and markets
The Group is largely dependent on a
dynamic, diverse and politically volatile
marketplace, particularly in Automotive,
which is exposed to many external
political and economic pressures.
These include pressures to improve
urban air quality, reduce greenhouse
gas emissions, provide independent
emissions testing and to navigate the
impact of Brexit and trade tariffs.
This could cause changes or
uncertainty in the product plans of
major customers or government policy,
leading to delays in the placement of
new orders or insourcing of activity,
the redirection, deferral or curtailment
of existing contracts, slippage in
payments or variations in demand
for resources, and availability of R&D
funding. The precise timing of the
receipt of orders and the utilisation of
our resources to generate revenue and
profit may give some volatility in our
ability to forecast future performance.
These risks are mitigated by the strategy of diversifying the Group to reduce
exposure to any one specific customer, territory or market sector. Challenges
currently being faced by our Automotive businesses across the globe can
be mitigated by other Technical Consulting businesses and Performance
Products. The success of this strategy is measured by the key performance
indicators for customer dependency and sector diversity shown on page 18
and by the geographic spread of revenue, as disclosed in Note 3(b) to the
financial statements.
In the event of a sudden downturn in a market sector or the wider economy,
contingency plans are quickly deployed to minimise the impact on short-
term performance and to preserve cash whilst protecting the long-term
needs of the Group’s stakeholders. The impact of insolvency risk is mitigated
by robust working capital management and the use of credit insurance
where this is economically available.
Brexit
Brexit is a source of additional political,
regulatory and economic instability,
which could potentially have a
significant impact on the Group for an
uncertain period of time.
The Group has assessed the risk, taken
appropriate action as necessary, and
continues to monitor the situation in
readiness to change and implement
further plans as more information
becomes available.
The main areas of potential impact
are these: trade tariffs, exchange rates
and supply chain disruption within
Performance Products, the need for
additional certifications in the EU
for Rail, the ability to recruit and the
mobility of people to work within
the EU and the UK, and the ability to
contract with customers between the
EU and the UK.
Contracts
The majority of the Group’s revenue
arises from fixed price contracts for
engineering, technical, environmental
and strategic consultancy services,
together with accreditation and
independent assurance services, with
an increasingly broad range of projects,
customers and geographies. There is a
risk that the obligation to complete the
agreed scope of these contracts may
be carried out in a longer timescale or
less cost-efficient manner than initially
estimated, reducing profit margins.
In product supply contracts, there is a
risk of product liability, recall or warranty
claims and dependency on specialist
suppliers.
Contracts denominated in foreign
currencies can be subject to exchange
rate risk.
Failure to perform on contracts within
estimated cost and delivery timescales
could impact profitability. Faulty
products, or the infringement of the
rights of others, could potentially
subject the business to increased costs,
a claim from a customer, reputational
damage or reduced opportunity for
repeat business.
Failure of production processes or
product validation could lead to
warranty or recall claims. Failure or
poor performance of a supplier could
disrupt delivery to customers and
increase operating costs.
Unhedged adverse foreign exchange
rate movements on contracts could
also affect profitability.
In Performance Products we have ensured all documentation is in place to
continue to export to key clients in the EU. We have considered the potential
impact of tariffs, exchange rate movements and logistics disruption on our
EU supply chains. Arrangements are in place to increase inventory levels.
Our Rail Notified Body (‘NoBo’) accreditation in the UK will no longer be valid
in the EU after Brexit, so we have obtained NoBo status from the Danish and
Dutch certification authorities so that we can maintain access to the
EU market.
To reduce the risk of loss of contracts with the European Commission, we
have added capability in the Netherlands to successfully contract with the
European Commission and provide them with ongoing support.
We are monitoring the potential impact of Brexit on employee mobility and
our ability to recruit EU nationals for UK roles and vice versa. We believe that
our range of geographic locations across Europe will continue to make us an
employer of choice.
Project leadership and management are the Group’s core competencies.
Led by the Chief Operating Officer, the Group remains focused on the
continuous improvement of these functions.
Risks are proactively managed by clearly defined lead qualification, bidding,
contracting and project management processes, whereby projects are
initially categorised according to their risk level and their performance is
continually assessed throughout the life of the project, which in turn dictates
the level of approval or review required. Internal procedures are in place to
ensure that the technical content of our output is of high quality and meets
customer requirements without infringing the rights of others, and within
time and cost estimates.
Procurement processes are in place to assess critical suppliers and selections
are often made with the involvement of the customer. In product supply
contracts, there are rigorous quality assurance processes in place to reduce
the risk of product liability, warranty and recall claims.
Significant contracts in foreign currencies are hedged to protect against
volatility in exchange rates.
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Creating a world fit for the future 45
The failure to recruit, develop or retain
the very best talent would restrict
growth and the execution of our
strategy, and would have an impact on
delivery and customer relationships.
The Group is focused on a model of ‘bringing in and bringing on’ the best
talent. We aim to ensure that we actively develop and manage staff to
encourage their optimum contribution; we foster mobility and professional
development, and we provide appropriate remuneration and working
conditions. Our IT infrastructure enables us to share work and mitigates
mobility issues. Our people as stakeholders are discussed further on pages
36 and 37.
Principal risks and uncertainties
Principal risk
Impact
Mitigation
People
Ricardo is a diverse business that is
knowledge-driven and people-led, with
a focus on attracting and retaining the
best talent. Recruiting, developing and
retaining knowledge and talent in the
right locations is essential.
Technology
The business is enabled through the
development of new technology to
meet the needs of market sectors,
customers, and regulators on varying
time scales.
If the Group invests in the wrong
technologies, it could lose marketplace
advantage and levels of business
activity could reduce. If there are
movements in the implementation
of new regulations, which in turn
accelerate or delay customer
programmes dependent on new
technology, the time taken to deliver
returns from our R&D programmes
may also increase.
Laws and regulations
The Group’s operations are subject to
an increasingly wide range of evolving
domestic and international laws and
regulations, including restrictions,
standards and tax legislation.
Non-compliance with, or changes
to, laws and regulations including
restrictions, standards and tax
legislation could expose the Group to
fines, penalties or reputational damage,
or result in trading restrictions which
could have a materially adverse impact
on the business or impede the Group’s
ability to recover certain available tax-
related credits.
Our R&D programmes are developed through a mixture of customer
consultation, long-range forecasting, thought leadership and deep
technology roadmap development. Many of our programmes are
collaboratively developed and delivered with customers, partners,
governments and suppliers, which creates strong links to the market and
ensures the output is relevant and credible.
The programmes are approved and delivered by Ricardo Innovations, a
division which operates as a global R&D organisation, singularly focused on
the delivery and exploitation of approved R&D programmes. This enables
staff and facilities across multiple geographies to be dedicated to relevant
programmes, which accelerates the delivery of our innovative products
and services to the market and promotes the exploitation of developed
intellectual property and know-how. Further details of a selection of our
current R&D programmes are given on pages 28 and 29.
To mitigate these risks, the Group has a number of defined policies and
operating procedures in place, and takes professional advice where considered
necessary, to ensure that the Group acts upon current and expected changes
in legislation. Our Code of Conduct, which is published on www.ricardo.com,
ensures that employees and others act with the highest ethical standards and
within local legal and regulatory requirements.
The Group’s internal audit programme includes within its remit the review
of compliance with applicable legislation and regulations, and awareness
of key Group policies and procedures. These are updated as regulations
change and as a result of our continuous drive to adopt best practice. We
aim to anticipate the impact of working in new countries and new sectors,
particularly within our Rail business, which operates in a growing list of
territories and cultures, each with its own regulations, standards and laws
with which we need to comply.
Unsettled tax credits claimed within a financial year are recognised to an
appropriate level at which management is highly confident of full recovery,
and in a manner that is consistent with both current legislation and
professional advice.
Defined benefit pension
scheme
The Group has a UK defined benefit
pension scheme which currently has a
funding deficit. The uncertainty of Brexit
continues to impact the volatility in the
assets and liabilities of the scheme.
Any decline in the value of the pension
fund assets, improvement in mortality
assumptions, long periods of high
inflation or decreases in interest rates
could increase the funding deficit
and require additional funding
contributions in excess of those
currently expected.
The Group closed the pension fund to future accrual in 2010. The current
funding plan was agreed on the basis of a valuation undertaken as at
5 April 2017 and anticipates deficit recovery contributions being made until
July 2022. In addition, the Group regularly monitors the performance of the
pension fund.
Further details of the Group’s defined benefit pension scheme can be found
in Note 24 to the financial statements.
Financing
The Group is in a net debt position,
having drawn on available facilities
primarily to fund acquisitions
There is a risk of the Group being
unable to secure sufficient financing at
reasonable cost in order to carry out its
strategic objectives.
Information security
Ricardo has valuable intellectual assets
comprised of propriety, customer, and
supplier data.
The theft or loss of intellectual assets
could result in reputational damage,
loss of competitive advantage,
business disruption and financial
penalties.
46 Ricardo plc Annual Report & Accounts 2018/19
This risk is mitigated by robust cash and working capital management,
regular process improvement initiatives, monitoring actual cash flows to
budgets and forecasts, maintaining good relationships with the Group’s
bankers and ensuring that sufficient borrowing facilities are in place at all
times to support the Group’s funding requirements to deliver on its growth
strategy, with additional headroom available to meet possible downside
scenarios.
The Group has sufficient headroom in its facilities and covenants and
renewed its borrowing facilities in July 2018, increasing the committed
facility to further support the Group’s growth strategy for an extended term
to 2023.
Further details of the Group’s borrowing facilities and other financial risks can
be found in Notes 21 and 23 to the financial statements, respectively.
Ricardo has implemented a global Information Security Management
System (‘ISMS’) and achieved certification to ISO 27001 information security
at our main facilities.
The Group IT Director is accountable for managing information security
resilience, which includes cyber risk. Dedicated information security
resources monitor and manage our threat profile. External penetration tests
are conducted to augment our control regime.
Information security risks are reviewed by the Group IT Director each quarter
and integrated with the Group’s enterprise risk management process.
Bi-annual briefings on information security are made to the Audit Committee.
Viability statement
The Directors have assessed the prospects of the Group in
accordance with provision C.2.2 of the 2016 UK Corporate
Governance Code for this year ended 30 June 2019. The 2018 Code
was published in July 2018 and places greater emphasis on the
Board’s role in this assessment, with which we are compliant before
the 2018 Code takes effect from 1 July 2019.
Assessment of viability
The three-year business plan reflects the best estimate of the prospects
of the Group and has been stress-tested for the following scenarios:
• 20% reduction in revenue, offset by associated cost savings;
• 5% increase in LIBOR interest rates; and
• A further scenario combining both of the above.
The context supporting the assessment
The Group’s prospects are underpinned by its business model
and strategy, which can be found on pages 12 to 27. The Group
continues to follow a balanced approach to its strategy, which is
subject to ongoing monitoring and development as described
herein. The underlying operating profit of the Group has grown
on average by 7% each year over the last five years and the
Group has a year-end order book of £314m, of which 32% is
expected to be workable beyond 12 months from the year-end.
The year-end order book comprises the value of all unworked
purchase orders and contracts received from customers.
The strategy of the Group is to grow its diversified engineering,
technical, environmental and strategic consultancy business, as well
as its manufacturing and assembly operation for high-performance
products. These businesses focus on the development of longer-
term, multi-year contracts and relationships, underpinned by global
macro trends. The Board has considered the risk appetite and profile
of the Group in this context, and has determined that this remains
appropriate for the Group as a whole.
Assessing the prospects of the Group
The Group’s prospects are assessed primarily through its annual
strategy review and business planning processes, which cover a
five-year period and a three-year period, respectively, and are both
led by the Chief Executive Officer.
The strategy review is a forward-looking process and is
undertaken by the Group’s constituent divisions, with full
participation by members of the Board, which results in a five-year
strategic plan. Part of the Board’s role is to review the performance
of the Group in the last financial year and to consider whether the
strategic plan remains appropriate. This includes an assessment
of changes in the market and competitive environment, together
with macroeconomic, political, societal and technological changes.
Actions are implemented as necessary to continue to support the
strategic plan.
Detailed business plans are also prepared during the last quarter
of each financial year by all the Group’s constituent divisions, with
the involvement of relevant functions including Finance and
Treasury; these plans are then reviewed and approved by the
Board. The first year of the business plan forms the Group’s annual
operating budget. This is subject to a re-forecast on a monthly basis.
The second and third years are based on the overall content of the
year one business plan together with the strategic plan, having
been flexed for known or anticipated events.
The impact of each of these scenarios on the Group’s business plan has
been quantified and presented to the Board as part of the approval
process. These scenarios, which are based on aspects of the Group’s
principal risks and uncertainties, including customers and markets, Brexit,
contracts, and financing, as set out on pages 45 and 46, represent severe
but plausible circumstances that the Group could experience.
The results of our stress testing showed that the Group would be
able to withstand the impact of these scenarios occurring over the
period of the plan, by making adjustments to its operating activities
within the normal course of business.
The Group also performed reverse stress testing on its financial
plan using these scenarios to identify the point at which its banking
covenants would be breached, as this would represent a serious
threat to the Group’s liquidity. None of the scenarios required were
considered to be plausible, and more severe actions would be taken to
preserve the liquidity of the Group.
Viability statement
The Directors have assessed the prospects of the Group over the
three-year period to 30 June 2022 and confirm that their assessment
of the principal risks and uncertainties facing the Group was robust.
A three-year period was selected for the following reasons:
• This period reflects the detailed business planning cycle;
• Lead times on customer contracts and typical engineering
programmes are no longer than three years; and
• Although the strategic plan covers a five-year period, the Group’s
order book and pipeline of opportunities does not extend
significantly beyond three years.
Whilst the Directors have no reason to believe the Group will not be
viable beyond the three-year period of this assessment, a three-year
period is deemed most appropriate given the inherent uncertainty
involved, the stress-testing scenarios considered as part of the three-
year business plan, together with the reasons outlined herein.
Based on their assessment of prospects and viability, the Directors
confirm that they have a reasonable expectation that the Group will
be able to continue in operation and meet its liabilities as they fall due
over the three-year period ending 30 June 2022.
Going concern
Given the viability statement provided above, the Directors therefore
considered it appropriate to prepare the financial statements on
a going concern basis, as explained in Note 1(a) to the financial
statements on page 128.
Our 2018/19 Strategic Report, from pages 8 to 47, has
been reviewed and approved by the Board of Directors
on 11 September 2019
Dave Shemmans, Chief Executive Officer
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Creating a world fit for the future 47
Case
studies
48 Ricardo plc Annual Report & Accounts 2018/19
Air Quality and
Climate Change
Connectivity and
Intelligent Devices
Energy Security
and Sustainability
Global
Stability
Natural Resource
Scarcity
50 Smarter rail electrification
54 Supporting Australia’s circular economy
58 Helping NASA navigate ‘big data’
Reducing motion sickness in
62
autonomous vehicles
66 Smart, urban, and every inch a BMW
70 Spark of inspiration for natural gas engines
Creating a world fit for the future 49
Rapid
Urbanisation
Smarter rail
electrification
50 Ricardo plc Annual Report & Accounts 2018/19
The international rail industry
is an important focus for
governments and regulators
in their drive to reduce carbon
emissions and improve
sustainability. Ricardo is at
the forefront of this mission,
helping authorities to achieve
this with smarter approaches
to electrification and tackling
the parallel issue of air quality.
ail electrification has long been seen as a means
of improving the energy efficiency of passenger
train propulsion in relation to the alternative of
diesel traction; more recently, it has also been
seen as a means of avoiding air pollution at the
point of use. On a like-for-like basis, electric trains are lighter
in weight, accelerate more quickly, have lower maintenance
costs and consume less energy than diesels.
R
But while electrification may have distinct benefits once
in place, it is far from a low-cost option in terms of upfront
capital investment. Despite the significant efforts being
made to reduce costs, it is almost inevitable that most mixed
networks of urban, intercity and rural routes will include
regions for which the business case for conventional overhead
electrification cannot be made.
A key challenge for the rail industry internationally is to
look at how gaps in electrification can be accommodated,
whilst still maximising the proportion of electric traction. Gaps
in electrification can arise for a variety of reasons – perhaps
for aesthetic considerations around installing a catenary
system for a light rail or tram system in a historic city centre,
or because there is insufficient commercial justification for
the investment required for a rural route with lower traffic
volumes and load factors.
Partial catenary systems
The Ricardo Rail team in Utrecht was asked by the northern
Netherlands provinces of Fryslân and Groningen to investigate
new approaches to electrification. The provinces have
taken the political decision to aim for zero-emissions public
transport by 2025, both in terms of point of use and the
generation of the energy used: this means that an alternative
to diesel-based operation of the regions’ rail lines is needed.
The seven rail routes running through the area form part
of the 5% of the network in the Netherlands that remains
unelectrified. Ricardo Rail had previously conducted a study
Creating a world fit for the future 51
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Smarter rail electrification
Ricardo is investigating the use of its IGNITE
systems modelling software to optimise
traffic flows in power-restricted pinch points
on DC third-rail systems
with station-based recharging points similar to those used for
battery bus networks.
that demonstrated that full conventional electrification of these
lines was not cost effective due to the comparatively light load
factors and train frequencies. For this reason, Ricardo Rail was
contracted, in collaboration with infrastructure consultancy
Arcadis, to evaluate options for range-extender solutions
based on hydrogen fuel cells used in the form of a hybrid
propulsion system, or for partial catenaries in combination with
higher capacity on-board battery energy storage. With recent
improvements and declining costs in battery systems, the latter
was clearly identified as the more attractive solution.
The team modelled a range of scenarios combining station-
based recharging with partial electrification. In the partial
electrification zones, trains use the overhead line for both
their immediate tractive power needs as well as for battery
recharging. This was augmented in the non-electrified sections
The initial scenario was based solely on station-based
recharging without any electrification beyond the existing
network. Analysis of this mode of operation showed that the
trains’ on-board batteries would be fully depleted on all but
three of the seven routes modelled, so some level of additional
power supply for recharging would be required. Two further
scenarios were simulated with small but crucially important
sections of partial catenary – representing just 4 km (1.5%) and
10.5 km (4%), respectively, of the network covered by the routes.
The 10.5 km partial catenary scenario demonstrated sufficient
capacity to operate the entire timetable on battery-equipped
trains and, through the inclusion of this additional length of
overhead line, this simulation indicated that the need to install
the two station-based recharging facilities could be bypassed,
thus mitigating part of the infrastructure investment required.
52 Ricardo plc Annual Report & Accounts 2018/19
Smarter rail electrification
Ricardo is working with rolling stock leasing company,
Porterbrook, to use on-board batteries to eliminate diesel
engine operation in built-up areas where there is no
electrification of the rail network – a first in the UK
Energy Saving Trust, the Ricardo team is identifying potential
sites to install community-owned solar, wind or hydroelectric
generators that could directly supply the new overhead lines
with low-cost, low-carbon electricity. The study is also scoping
technical solutions for directly connecting renewable sources
of energy to overhead electrified lines and analysing how best
to integrate new energy storage technologies to help keep
electrification costs down.
Station air quality and last mile
emissions-free running
Poor air quality is a particular concern for major rail termini
and interchanges served principally by diesel fleets. However,
it can also affect hubs served by mixed traffic, particularly
where station topology is challenging due to deep cuttings
and covered concourses. Ricardo Rail and Ricardo Energy &
Environment’s air quality teams are researching the issue of such
pollution hotspots, and are examining potential abatement
options for immediate, medium and longer term solutions. The
hybridisation of the existing diesel-powered fleet in the UK is
an innovation on which Ricardo is working with UK rolling stock
leasing company, Porterbrook. The resulting HybridFLEX project
aims to eliminate diesel operation in built-up areas where there
is no electrification of the rail network. It plans to achieve this
through the use of battery operation during the last mile of
running in the vicinity of urban areas, as well as during station
stops. In addition to reducing diesel emissions in urban areas, a
further benefit will be to significantly reduce noise.
As these examples demonstrate, the work of Ricardo Rail in
exploring the potential for innovative and smart electrification
of rail networks offers valuable synergies for customers by
drawing together the skills and expertise of Ricardo’s Rail,
Energy & Environment and Automotive businesses. With further
opportunities already being explored in areas such as the use of
advanced systems modelling software to optimise traffic flows
in power-restricted pinch points on DC third-rail systems, and
using the railway electrification system to augment grid-scale
energy transmission and connection of distributed renewable
resources, this is just the start of things to come.
Creating a world fit for the future 53
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Armed with the information generated from the study,
the provinces of Fryslân and Groningen and the regional rail
operator, Arriva, can now make an informed choice about the
possible roll-out of a battery-powered fleet, with greater insight
into the costs and the modifications required to trains and
infrastructure.
Incorporating renewable energy
Elsewhere, on the UK rail network, Ricardo is assisting in the
Green Valley Lines project to incorporate community renewable
energy schemes into the proposed smart electrification of the
commuter lines running to and from the Welsh capital, Cardiff.
Aside from its benefits in reducing the carbon intensity of rail
traction, this approach can be particularly attractive in areas
where the power grid is restricted and would otherwise require
significant upgrades to supply such electrification schemes.
Working with infrastructure owner, Network Rail, and the
Supporting
Australia’s
circular
economy
54 Ricardo plc Annual Report & Accounts 2018/19
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With its newly launched office
in Brisbane and the recent
acquisition of PLC Consulting
in July 2019, Ricardo Energy
& Environment is making
important inroads into
the Australian market. The
business is helping both the
public and private sectors
grasp the opportunities
presented by world-class
innovations in waste and
resource management, and
is engaging in a range of
strategic projects that are
helping the country to move
towards a circular economy.
R
icardo Energy & Environment has supported waste,
energy and water projects across the Asia-Pacific
region for many years, but its development of a
local presence in the Australian waste and resources
sector since entering the market in 2018 has been
even more decisive. The timing is also prescient: Ricardo is
engaging with the Australian market at a stage where demand
for services aimed at facilitating sustainability and circular
economy initiatives has never been greater.
The Australian economy has experienced one of the longest
periods of sustained GDP growth in the developed world, not
least due to the nation’s population expansion and its extensive
mineral resources. This growth, coupled with the increasing
need to improve sustainability and climate resilience, means that
any developments in the infrastructure and utilities sector must
consider waste, water and energy together to capture a truly
holistic view of the environmental impacts of projects. From
its new office in Brisbane, Queensland, Ricardo is supporting
projects in these areas for state and local government agencies,
as well as a range of private-sector clients.
Creating a world fit for the future 55
Supporting Australia’s circular economy
Creating Australia’s first circular
economy community
Located 40 km south-east of Brisbane, the regional community
of Yarrabilba is situated within the Logan local government area.
At present, Logan comprises over 3,000 homes, but it is planned
that by the completion of a 30-year development, this will have
grown to 17,000, housing a population of approximately 45,000
and putting the community on a similar scale to Queensland’s
regional cities. The Yarrabilba development will include a town
centre, a business park and neighbourhood hubs, as well as
community, education and employment facilities.
Yarrabilba is being developed with the aim of creating
Australia’s first circular economy community – one that
integrates social, economic and environmental values to provide
a dynamic and empowered community that fosters sharing,
access, connection, diversity and control. In support of this vision,
Ricardo was contracted by the developer of the Yarrabilba estate
– Sydney-based international property and infrastructure group,
LendLease – to support the development of a circular strategy
covering resources, energy, water and transportation. The initial
strategy report, delivered with the assistance of Ricardo, provides
a roadmap for the development of Yarrabilba up to the mid-
2020s and outlines the key steps of data collection, feasibility
assessments and identification of quick-win initiatives that will
enable the community to start to realise its bold vision.
56 Ricardo plc Annual Report & Accounts 2018/19
Helping the New South Wales EPA
shape policy
Working in partnership with the Institute of Sustainable Futures
at the University of Technology Sydney, Ricardo was contracted
to support the New South Wales Environmental Protection
Agency (‘EPA’) in the development of the state’s circular
economy strategy.
The project aimed to assess international best practice that
might be drawn upon, reviewing over 50 case studies across
Europe, Asia and the Americas, and examining the economic,
social and environmental costs and benefits in countries where
a circular economy is active. From this work, an assessment
could be made of the potential enablers and synergies for
implementation within the state of New South Wales.
In particular, the project reviewed the waste processing of
priority materials such as glass, paper, plastics and metals within
the state, as well as considering organics, electronic waste,
textiles and other problem wastes. The initiative engaged
with industry, local government and civil society stakeholders
through workshops on best-practice cases with applicability
Supporting Australia’s circular economy
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to the context of New South Wales. Based on this work and
through further consultation with policy experts and advisers,
Ricardo was able to develop short and longer term policy
recommendations, together with a suggested implementation
pathway.
Ricardo’s independent engagement of Steinert’s clients was
crucial for the assessment and development of a tailored leasing
approach for the company. Additionally, this aspect of the
project provided Steinert with further valuable insights into its
clients’ requirements and plans for the future.
Addressing new challenges and
opportunities in waste management
Based in Bayswater, Victoria, Steinert Australia is a company that
provides sorting and separation equipment to the waste and
recycling industries. Following bans on imported wastes and
recyclables introduced by China and other countries, there has
been recognition across industry sectors within Australia of the
need for increased local processing capability and improved
recycling rates.
Steinert Australia engaged Ricardo to review the potential
of adopting a leasing model for a selection of its products.
Specifically, Ricardo was tasked with qualifying the potential
of leasing for Steinert and defining a unique leasing model
suited to both the company and its clients. Work for this project
included extensive research into the existing leasing market, the
engagement of Steinert’s potential clients, and an analysis of the
financial implications of implementation.
A positive future
As this small selection of projects demonstrates, Ricardo
Energy & Environment’s first year in its new office in Brisbane
is providing an effective base through which it can deliver its
skills, expertise and insights across Australia. This local presence
has also been expanded with the acquisition in July 2019 of
Melbourne-based PLC Consulting, which will now operate as
part of Ricardo Energy & Environment. This is in addition to the
acquisition of Sydney-based Transport Engineering in May 2019,
which operates as part of Ricardo Rail.
The timing of Ricardo’s new focus on the Australian market
is entirely appropriate in meeting the needs of a growing
economy in which all stakeholders – from the federal and state
governments and local authorities to private-sector companies
and investors – are increasingly aligned in our mission to create
a world fit for the future.
Creating a world fit for the future 57
Helping
NASA
navigate
‘big data’
58 Ricardo plc Annual Report & Accounts 2018/19
Ricardo Defense is providing
the United States’ National
Aeronautics and Space
Administration (‘NASA’) with
advanced software for the
analysis and optimisation of
large and complex data sets
– so-called ‘big data’ – which
will be used in the planning of
future deep-space missions
N
ASA has an enviable and well-deserved reputation
for the planning and execution of the most
challenging, safety-critical and complex space
missions. Fifty years since placing the first humans
on the surface of the Moon and returning them
safely to Earth, the agency continues to strive for new frontiers:
now it is actively pursuing plans that envisage a return of
astronauts to the lunar surface in 2024, with ambitions to extend
human exploration to Mars and beyond in the years that follow.
In parallel, NASA’s unmanned missions are following in the
footsteps of the pioneering Voyager series of spacecraft, the
first human-made objects to enter interstellar space. The new
missions include numerous probes exploring the planets of the
solar system, and the investigation of the Martian surface by a
series of rovers, most recently the Curiosity vehicle of the Mars
Science Laboratory mission that remains active since touching
down on the red planet in 2012.
The planning of these long-duration, deep-space missions
is an extremely complex and data-intensive process, requiring
the close and effective collaboration of numerous specialist
scientists and engineers, ranging from risk managers and
experts in human factors and systems analysis to user interface
developers. Standard modern tools and techniques such as
spreadsheets and project scheduling systems would have been
beyond the wildest dreams of the engineers who planned
the Apollo programme in the 1960s, but even today they are
inadequate for addressing large, diverse, and dynamic data
sets for the modern, high-criticality missions now envisaged
by NASA. The planning of such operations that risk lives and
property on this scale can have only very limited tolerance and
scope for ignorance, deficiency, or accident.
Software for 'big data' analysis
The visualisation, analysis and manipulation of large and
complex data sets used in operational planning is an expertise
that Ricardo Defense has developed for use with its military
customers. This is now being delivered to NASA in the form
Creating a world fit for the future 59
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Helping NASA navigate ‘big data’
of advanced visual data analysis software that allows teams
to quickly analyse extremely large data sets in order to isolate
potential conflicts, risks, human or system errors, or excessive
workload. This enables operating plans to be optimised,
including the provision for resilient contingencies. The software
also enables the investigation of opportunities to eliminate non
value adding activities, thereby minimising cost, complexity, and
susceptibility.
The process on which it is based is known as Hierarchical Task
Analysis (‘HTA’), which enables groups – ranging from a few
individuals, up to large multi-organisational engineering teams
– to systematically assess essential functions, interdependencies
and capabilities to an appropriate level of clarity. This hierarchal
analysis approach enables the development of a highly granular
incremental understanding of each aspect of the wider business
processes, providing a capability for continuous analysis of the
probability of success or inherent resilience.
The method enables collaboration between teams and the
partners involved, while at the same time protecting sensitive
information and intellectual property. A piece-wise analysis
of interrelated functions of a complex plan is followed, with
each successive level of decomposition providing a budget
of constraints for all lower levels to ensure that more detailed
activities are compliant with requirements of the higher-level
plans. The software automatically identifies conflicts and
opportunities for improvement where they arise, so that task
expectations and the overarching plan can be developed and
optimised with the highest probability of success.
Ricardo Defense’s visual
data analysis software –
supplied to NASA –
allows teams to quickly
analyse extremely large
data sets in order to
isolate potential
conflicts, risks, human or
system errors, or
excessive workload
60 Ricardo plc Annual Report & Accounts 2018/19
Helping NASA navigate ‘big data’
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NASA aims to land the first woman, and the next man, on the
Moon by 2024 – the agency plans that the Lunar Gateway will orbit
the Moon and serve as home base for human and robotic missions
to the lunar surface and, ultimately, to Mars
Visualisation is key
Pioneered by Ricardo, important aspects of the software
provided to NASA are its extensive data visualisation capabilities
and drag-and-drop graphical tools that follow standard Business
Process Modelling Notation. These address the challenges of the
large, dynamic data sets associated with collaborative planning
of sequential and concurrent activities that may each contain
many potentially conflicting attributes.
A creative workflow technique enables analysts to follow their
own preferred approach. Some, for example, may be detail-
oriented and choose to flush out the full set of characteristics
for each task in turn. Others may be methodical in dissecting
functions in a rigorous decomposition, while still others follow a
train-of-thought workflow through the business activities. This
creative workflow approach permits multiple users to follow any
order through the planning data, exposing crucial insights in a
truly collaborative manner.
Graphical tools include a TreeMap, enabling a comparative
interrogation of activity complexity, including risks, resources,
and errors. Complexity analysis provides insight into the
relative weighting of contributing factors that will reduce the
probability of success, so that they may be eliminated, reduced,
or mitigated. A spider or radar diagram quickly accentuates
inconsistencies between the budgeted constraints for an activity
and the aggregated constraints from all elaborated subtasks. A
quick selection changes the analysis focus to human-machine
screen mock-ups for usability and user experience evaluation of
the proposed final system. Dependencies, conditions, and time
constraints are also readily visible for the activity under analysis.
The software also includes a chromoscopic indicator palate
– a unique, Ricardo-developed feature – that facilitates 2D and
3D diagnostic analysis and correction of potential obstacles
to mission success. User-specific and team-defined criteria
are presented as a unique background or font colour, using
a slider to switch between a range of assessment filters. This
might be used, for example, to quickly identify all activities
that are allocated to a certain team, subcontractor or partner
organisation, or to highlight all activities with a risk exceeding a
pre-set threshold.
Multi-industry potential
The powerful and highly sophisticated software provided
to NASA was originally conceived and developed for the
requirements of Ricardo Defense’s military customers. Going
beyond this initial focus, the software has clear potential
to support the planning of a wide range of mission-critical
operations across many industrial sectors, from energy
systems management, autonomous vehicle development,
hazardous materials handling, disaster response planning, and
transportation systems optimisation.
In this application, this innovative Ricardo 'big data' analysis
technology has been delivered and is in pilot use by the
NASA Human Factors engineering teams. It is thus helping
the organisation that went to the Moon fifty years ago to plan
effectively for a successful return to the lunar surface – and a
bold onward programme of human deep-space exploration.
Creating a world fit for the future 61
Reducing motion
sickness in
autonomous
vehicles
62 Ricardo plc Annual Report & Accounts 2018/19
62 Ricardo plc Annual Report & Accounts 2018/19
Ricardo engineers have
been working to identify the
causes of motion sickness
and are creating a software
package that aims to
minimise the effects of this
condition on the passengers
of both autonomous and
conventional vehicles
M
otion sickness – otherwise known as kinetosis
– is not a new phenomenon, but in order to
provide high levels of customer comfort in
new connected and autonomous vehicles
(‘CAVs’), the issue has now become a clear and
pressing problem. Thus far, the key priority in the development
of CAVs has been safety, which remains paramount and is
a subject of ongoing research and investment by Ricardo.
However, motion sickness is a vital issue if consumer acceptance
of driverless vehicles is to be achieved: after all, customers will
be expecting levels of comfort close to those of a living room
environment. Users will want to be able to work, to watch or
read from a screen, or hold a conversation during their journey,
perhaps while sitting in a swivelled, side- or rear-facing position.
These are all known triggers for motion sickness.
As a first step to understanding the problem, the Ricardo
team constructed a biomechanical model including parameters
known or thought to contribute to kinetosis, a phenomenon
which is generally believed to be caused by a disconnect
between the motion as experienced by the vestibular system
(sense of balance) and what the eyes perceive. Children and
teenagers tend to suffer from this more often than adults.
The parameters of the model included vehicle suspension
set-up, driver inputs, human physical factors – including
weight, height, sex, age, and health – as well as individual
considerations such as sensitivity to car sickness and average
alcohol consumption. Seating position, seat type and cabin air
quality were also considered. A simplified ‘crash test dummy’
style simulation showed the relative impacts of the vehicle’s
motion on its occupants, as measured by accelerometers under
the tested scenarios, and taking all of the different parameters
into account.
This biomechanical model was then correlated and
refined against real-life data collected in a small-scale on-
road trial, based at Ricardo’s Midlands Technical Centre near
Leamington Spa in the UK. For this, the participants – who
looked intermittently at their mobile phone screens, just as
occupants of autonomous vehicles would – were wired up
with accelerometers, driven around three different routes, and
Creating a world fit for the future 63
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Reducing motion sickness in autonomous vehicles
Cars have traditionally been
engineered for the requirements
of 40 to 60 year-old front seat
occupants – Ricardo's research
aims to help automakers focus
on the well-being of every
occupant, including children in
the age group most susceptible
to kinetosis
observed on in-car video cameras. Importantly, there were male
and female participants of different sizes and body shapes, and
each showed very different reactions to higher acceleration,
especially over speed bumps. In the past, car designers had
tended to assume that a 40 to 60 year-old male would be
driving, with the comfort of passengers in second and third row
seats afforded relatively less attention. Today, engineers take the
well-being of every occupant into account.
The resulting Ricardo motion sickness prediction software
can be applied from the very early stages of a vehicle’s design
to provide a more comfortable ride. The model can be set to
represent, for example, an eight-year-old passenger – male or
female, with or without a known propensity to motion sickness
– to see how they will respond to such factors as passive spring
damper settings, ride height and roll stiffness, and to uneven
road surfaces such as cobblestones. It can also be used to
calibrate seating position, seating design, and the overall layout
and ergonomics of the cabin.
In a CAV, in-built software can record data as manoeuvres
are executed, such as cornering, overtaking and negotiating
roundabouts in order to help optimise the vehicle’s path to
reduce motion sickness. In addition, the ride on that path can
then be modified by adjusting parameters such as chassis
stiffness and automated driver tuning to further improve
occupant well-being. Furthermore, passengers who show signs
of motion sickness could be identified by sensors – according
to biometric indications such as eye and bodily movements,
breathing, sweating, and even facial expression. Sickness could
64 Ricardo plc Annual Report & Accounts 2018/19
Reducing motion sickness in autonomous vehicles
In an autonomous vehicle, data can be accumulated
over a series of manoeuvres or corners to optimise its
path – helping to avoid motion sickness for passengers
then be avoided not just by adjusting the vehicle’s trajectory,
but also by providing the right amount of cool air, adjusting the
seating position, or lowering window blinds. In conventional
vehicles, the software could prompt drivers to take measures to
avoid their passengers becoming unwell, in much the same way
that gearshift indicators are currently used to prompt a more
economical driving style.
In addition, engineers in Ricardo Innovations are developing
a specific biodynamic model for those reading while travelling,
since this is a particular cause of motion sickness. The position of
a book, tablet or phone relative to a passenger’s head, and the
tilt or angle of the head, are all believed to be significant in this,
as well as in the fatigue that comes with continually needing
to refocus. A metric covering the ‘peripheral flicker’ of passing
lights and objects – another known trigger of motion sickness
– is incorporated, using virtual reality technology as a means of
modelling all of the variables.
Ricardo’s model and its predictive software are already
attracting attention from a wide spectrum of existing vehicle
manufacturers, new market entrants in the electric and CAV
sectors, and mobility-as-a-service innovators. There is potential
too for the technology to be made available to consumers as an
Ricardo’s model and its
predictive software are
already attracting
attention from a wide
spectrum of existing
vehicle manufacturers
app, on subscription. Further opportunities lie in the integration
of nausea prediction with ‘e-nose’ electronics to detect and
control scents and odours in vehicle cabins, as the olfactory
system (sense of smell) is another aspect highly associated
with motion sickness. More immediately, engineers at Ricardo
Innovations are focused on increasing and improving the data
set on which the algorithms are based, setting up a larger
scale research programme involving the participation of local
schoolchildren and linking it to their science curriculum. This
work is expected to be completed later this year.
This highly innovative Ricardo project means that for both
the premium vehicles of today as well as the autonomous CAVs
of tomorrow, this new software technology could bring closer
the day when motion sickness becomes no more than an
unpleasant collective memory.
Creating a world fit for the future 65
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Smart, urban,
and every
inch a BMW
66 Ricardo plc Annual Report & Accounts 2018/19
Building on more than a
decade of co-operation
with BMW Motorrad, Ricardo
Motorcycle has partnered with
the German premium bike
manufacturer to develop a
new generation of mid-sized
scooters that distil the qualities
of the highly successful C 650
maxi-scooters into the smaller
and more accessible C 400
series.
B
MW’s C 650 range of luxury maxi-scooters, co-
developed with Ricardo, has been a major critical
and commercial success, prompting an initiative
to extend the premium concept into the heart
of the sector. However, the global market for
smaller scooters in the 400 cc category is already well served
by a number of established manufacturers, and to enter it and
succeed is a daunting task – even for a company of BMW’s
stature and standing. Yet, with the help of Ricardo, that is
precisely what BMW Motorrad is aiming to do with its new
C 400 scooters.
The challenge, put simply, was to design and manufacture
a scooter that could not only achieve a competitive price
point in this tightly fought market segment, but also gain
best-in-class status for refinement, performance, handling and
premium design values. For Ricardo, it was to be the most
daunting engineering task yet, in a relationship with the German
motorcycle manufacturer that has spanned more than a decade.
Successful partnership
Ricardo first began work on BMW Motorrad products back in
2006 when it took on the upgrade programme for the four-
cylinder K 1200 superbike engine to produce a new range of K
1300 motorcycles to be launched in 2009. The programme drew
on Ricardo’s extensive resources in the UK, in the Czech Republic
and in Germany, making for a truly multinational project.
The result was a resounding success and since then the
relationship has gone from strength to strength. Ricardo’s
engineering of the six-cylinder engine for the K 1600 touring
bike led to it earning rave reviews in the motorcycle press. The
first luxury maxi-scooters, again developed with substantial
Ricardo input, arrived in 2012 and continue to be available as the
C 650 Sport and C 650 GT – and since 2017 there has also been
an electric version, the C Evolution.
Creating a world fit for the future 67
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Smart, urban, and every inch a BMW
The concept for the new C 400 was very similar to that of the
larger scooter. Starting from the same base, the team aimed
to produce Sport and Touring variants of the scooter; these
became the C 400 X and C 400 GT, respectively. Even though
the C 400 parallels the thinking of the C 650, the two platforms
are completely different and there is no similarity or carry-over
between the maxi-scooter and the mid-sized one. Interestingly,
the idea of producing a Sport and Touring version from a single
platform originally came from Ricardo at the beginning of the
maxi-scooter project.
Design cues from the legendary BMW GS
On both the C 400 X and C 400 GT the BMW styling department
team introduced some of the design language from the BMW
GS off-road touring motorcycle. One of Ricardo’s concepts
introduced on the bigger scooter was the patented Flexcase
system, which first appeared on the C 650. This storage system
can drop down to allow a full-face helmet to be securely locked
away while the scooter is stationary, and can be used for general
storage when being ridden. While the Flexcase system is not
new to the market as a whole, the BMW machines are the only
scooters available with anything like it.
The main target for the chassis design was to create an
extremely rigid engine mounting and to achieve the highest
standards of handling feel. The chassis and fairings were
designed in collaboration with the team at Ricardo's technical
centre in Rimini, Italy. Formerly the nucleus of Italian scooter
specialist Exnovo, this business was acquired by Ricardo in
2016 to form the vehicle design and styling house of Ricardo’s
motorcycle operation.
Engine and transmission design
On the C 400 series a water-cooled, port-injected 350 cc single-
cylinder four-valve engine with a single overhead camshaft and
roller finger followers provides the power. Output is 34 hp at
7,500 rev/min and torque is 35 Nm at 6,000 rev/min; both the
C 400 X and C 400 GT conform to the latest EU4 motorcycle
emissions standards.
A scooter differs from a
motorcycle in that the engine
assembly also doubles as
the rear swinging arm and is
continually moving when the
scooter is being ridden. Ricardo
developed a coupling system
that provides a very high pivot
point for the engine, giving
superior riding characteristics
similar to that of a motorcycle
and widely acknowledged as
being best-in-class
68 Ricardo plc Annual Report & Accounts 2018/19
Smart, urban, and every inch a BMW
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Engine design work started in 2013 with some initial
information from BMW, and Ricardo was also involved in the
early benchmarking and defining of the specification. This
involved reviewing existing competitor products to establish the
optimum engine capacity, and BMW’s desire for similarity with
other BMW Motorrad engines.
Some scooter engines have a balancer shaft for smoothness,
yet some that do not still score well on vibration and refinement.
BMW looked at two main competitors; one which had the most
rapid performance but was not equipped with a balancer shaft,
and the other, rated highest for refinement, which did. The
objective was to achieve the best of both and become the new
benchmark for others to follow, so the decision was taken to
include the shaft.
The best position for the shaft was selected to quell vibration
and also take into account the desired swingarm pivot point.
Intake gas flow was also the subject of considerable simulation
work as the cylinder lies almost horizontally, so the air intake has
to turn through 180 degrees to exit through the swingarm.
Production transfer to China
Compared with previous projects, Ricardo was given much
more responsibility for the design and development, as well
as helping the new supplier base to deliver components
that met BMW’s stringent quality requirements. This alone
represented an entire area of work, but of course it went
without saying that the manufacture of the final vehicle also
had to meet BMW’s exacting requirements for quality
and refinement.
One of the ways this was managed was to perfect the
various assembly techniques in Europe, and then transfer
and demonstrate them in China. At that point the processes
were adjusted to suit the Chinese workforce.
Excellent outcome
The resulting C 400s are exactly as required by BMW:
scooters that are well designed, well specified and with
great handling. Like their larger predecessors, the new BMW
scooters have proved as popular with the world’s motorcycle
press as BMW had hoped. All in all, the new C 400s are fresh,
compelling products of which both BMW and Ricardo are
rightly proud, marking another step in what has proven to
be a hugely successful relationship between the
two organisations.
Creating a world fit for the future 69
Spark of
inspiration for
natural gas
engines
70 Ricardo plc Annual Report & Accounts 2018/19
Ricardo Software is
collaborating with European
research partners, including
Volkswagen, to create tools
enabling the development of
a new form of compact, lean-
burn automotive natural gas
engine. For use in future hybrid
electric powertrains, the new
engine offers diesel-like power
and performance, significantly
reduced CO2 and extremely
low NOX emissions.
C
ompressed natural gas (‘CNG’) has long been
recognised as an attractive alternative to
gasoline or diesel as a transportation fuel.
It is typically less expensive, exists in more
abundant reserves, and provides lower overall
greenhouse gas (‘GHG’) emissions when burned. Better still,
there are also significant supply chains being developed for
biomethane, the renewable equivalent of CNG that can be
derived from agricultural operations, domestic refuse disposal,
and water treatment works, as well as from power-to-gas
energy conversion plants. Coupled with a mature distribution
infrastructure for this fuel – including widespread existing filling
station availability – it is understandable that CNG continues to
attract significant worldwide interest.
CNG engines are at their most efficient in highway-based
applications when lean operation is employed through the use
of a pre-chamber for combustion initiation, allowing heat losses
to be reduced. While this is a popular solution for heavy-duty
truck and power generation applications, the need to miniaturise
an effective pre-chamber design within the package constraints
of an automobile engine – particularly one that has already been
downsized for extra efficiency – is a significant challenge. For this
reason, most passenger-car CNG applications have been based
on conversions of spark-ignited gasoline platforms, relying on
port injection and the use of a broadly homogeneous charge.
This approach places an effective restriction on the extent of
lean operation, thus restricting the fuel-saving and emissions-
reducing potential of light-duty automotive CNG operation.
The GasOn project
In order to help realise the full potential environmental and
emissions benefits of CNG combustion in the passenger
car sector, Ricardo Software has been participating in the
Creating a world fit for the future 71
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Spark of inspiration for natural gas engines
European Union's multi-partner Horizon 2020 project, GasOn.
Within this project, Ricardo is partnering with Volkswagen,
Empa, ETH Zurich and Poznan University of Technology on the
development of a new form of pre-chamber ignition (‘PCI’)
system that is capable of extending the lean limit of automotive
CNG operation, while also enabling the adoption of diesel-like
compression ratios.
In order to enable PCI systems to be designed effectively
within the time and resource constraints that are typical
of automotive product development, accurate and fast
computational fluid dynamics (‘CFD’) modelling of the mixture
formation and early flame kernel development in the pre-
chamber is essential. A review by the project team of the
physical models available in commercial CFD codes highlighted
a gap in the technology currently available. A particular issue
in this respect is that the initial stages of ignition in spark-
ignited engines typically occur at timescales, temperatures and
geometries which fall outside of the scope of conventional CFD
technology.
The main focus of Ricardo’s contribution to the research
was therefore the development of a new spark model for
incorporation into Ricardo’s existing VECTIS CFD software
package. The model needed to be sufficiently accurate to
capture the relevant physics of the highly turbulent and space-
constrained environment of a very compact PCI pre-chamber.
This engine concept operates in a very different realm to
72 Ricardo plc Annual Report & Accounts 2018/19
Spark of inspiration for natural gas engines
3D iso-surface shows the flame
temperature – stoichiometric
in pre-chamber with high
temperature and lean cool
combustion in the cylinder;
the slice through the plot
shows equivalence ratio
capable of delivering extremely low
emissions, diesel-like performance,
and impressive fuel efficiency in an
automotive-scale package.
CNG is already a very practical and
environmentally attractive alternative
to conventional liquid fossil fuels in
truck and other heavy-duty applications,
but the new miniaturised pre-chamber
concept is a significant enabler for this fuel
as a substitute for diesel and gasoline powered
passenger-car engines. In particular, the innovation
provides a highly fuel-efficient and flexible powerplant
for hybrid electric powertrains.
Crucial enabling CAE software
Importantly from a Ricardo Software perspective, the new
DDPIK spark and wall quenching models developed under the
GasOn project are now amongst the many advanced technical
features and capabilities incorporated into the commercial
VECTIS package. These physical models are not limited just
to PCI CNG applications but can also be used to facilitate the
development of other low-emission and high-efficiency engine
concepts. VECTIS and the entire suite of Ricardo Software
products incorporate these state-of-the-art physical models and
simulation capabilities – and for Ricardo’s engineering teams
as well as external software licensees this makes them a crucial
enabling technology for the creation of the next generation of
a wide range of ultra-low emissions, low carbon and high fuel
efficiency engines.
Creating a world fit for the future 73
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truck or power
generation engines; the physics
may be similar, but the pre-chamber and spark plug need to be
packaged within the same tiny volume as the injector would be
in a diesel engine.
Accurate modelling of the initial stages of spark ignition is
thus essential, and to achieve this the Ricardo team developed
a Dynamic Discrete Particle Ignition Kernel (‘DDPIK’) model
for incorporation into VECTIS. This advanced model captures
the physics of all stages of the spark process – from the point
that power is received from the ignition coil, to the transition
of the flame kernel supported by the spark discharge, to a fully
developed turbulent flame. The final stage is the transfer to the
VECTIS turbulent combustion model, which is a well-established
tool for the simulation of the combustion of natural gas and
other fuels. In addition to the sophisticated spark model, a
new and more highly resolved wall quenching model was
also created by the VECTIS development team. The avoidance
of excessive wall quenching is a crucial consideration in the
design of an automotive PCI CNG engine as it is essential for
combustion stability that the flame is able to propagate through
the pre-chamber nozzles and out into the combustion chamber
without being extinguished.
As with any new predictive modelling capability, it was
necessary to validate the approach in order to have confidence
in its use as a computer-aided engineering (‘CAE’) tool. This was
achieved through a range of approaches from experimental rig
testing through to a full prototype engine.
A positive automotive future for pre-
chamber gas engines
As a result of the collaboration between Ricardo, Volkswagen
and their partners in the GasOn project, a new design of engine
featuring PCI CNG combustion has been demonstrated as
Corporate
governance
74 Ricardo plc Annual Report & Accounts 2018/19
Air Quality and
Climate Change
Connectivity and
Intelligent Devices
Energy Security
and Sustainability
Natural Resource
Scarcity
Global
Stability
76 Board of Directors
78 Corporate governance statement
84 Nomination committee report
85 Audit committee report
88 Directors’ remuneration report
110 Directors’ report
113 Statement of Directors’ responsibilities
Rapid
Urbanisation
Creating a world fit for the future 75
Board of Directors
as at 30 June 2019
Patricia Ryan
LLB (Hons)
Group General Counsel and
Company Secretary
Patricia Ryan is a qualified
solicitor. She joined Ricardo’s
legal department in 2002
and was appointed Group
General Counsel in 2005
and Company Secretary in
November 2008. Patricia
holds an honours degree
in law from the University
of Westminster. Patricia
achieved the Certificate of
Investor Relations from the
Investor Relations Society in
February 2017.
Ian Gibson
BSc, ACA
Chief Financial Officer
Ian Gibson was appointed
Chief Financial Officer on
1 July 2013. A member of
the Institute of Chartered
Accountants in England
and Wales, Ian is a finance
professional with more
than 30 years of commercial
experience. He was
previously chief financial
officer of Cable & Wireless
Worldwide plc, where he
spent a total of 17 years in a
number of senior financial
management positions. Prior
to this, Ian spent 12 years at
Deloitte where he worked
in both the London and
Toronto offices.
Bill Spencer
BSc, FCMA, MCT
Non-Executive Director
and Chairman of the Audit
Committee
Bill was appointed Non-
Executive Director on
24 April 2017 and Chairman
of the Audit Committee on
8 November 2017. For 15
years until 2010, he was the
CFO of Intertek Group plc
and has since held audit
committee chair roles at UK
Mail plc and Exova Group
plc. Currently Bill is the
interim chairman, senior
independent director and
audit and risk committee
chairman of Northgate
plc. He is a Chartered
Management Accountant
and Corporate Treasurer and
has a BSc in Management
Sciences from the University
of Manchester.
76 Ricardo plc Annual Report & Accounts 2018/19
Laurie Bowen
BSc, MBA
Non-Executive Director
Mark Garrett
CEng, FIMechE, FREng
Chief Operating Officer
Laurie Bowen was appointed
Non-Executive Director on
1 July 2015. Laurie has over
30 years of international
leadership experience
at IBM, British Telecom,
Tata Group, Telecom Italia
Sparkle and Cable & Wireless
Communications. Laurie was
appointed non-executive
director of Chemring Group
plc on 1 August 2019.
Laurie has an MBA, a BSc in
Electrical Engineering and
a BSc in Computer Science
from Washington University
in St. Louis, Missouri.
Mark Garrett joined Ricardo
in 1998 and was appointed
Chief Operating Officer in
2010. Prior to joining Ricardo,
Mark spent 14 years in various
powertrain-related roles in
the Rover Group, including
at the BMW Engineering
Centre in Munich. He is a
Chartered Engineer and a
Fellow of both the Institution
of Mechanical Engineers
and the Royal Academy of
Engineering. Mark was also
appointed as non-executive
chairman of Secured By
Design Limited on
25 November 2016.
Board of Directors
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Sir Terry Morgan
CBE, FREng
Non-Executive Director and
Chairman
Sir Terry Morgan was
appointed Non-Executive
Director on 2 January
2014 and Chairman on
29 October 2014. He was
previously non-executive
chairman of Crossrail
Limited, High Speed
Two (HS2) Limited, The
Manufacturing Technology
Centre Limited, and NSARE
Limited (the National
Skills Academy for Railway
Engineering). Sir Terry
was also previously a
non-executive director of
Boxwood Limited and the
Department of Energy &
Climate Change.
Dave Shemmans
BEng
Chief Executive Officer
Dave Shemmans joined
Ricardo in 1999. He was
appointed to the Board
as Chief Executive Officer
Designate in February
2005 and became the
Chief Executive Officer on
4 November 2005. Prior
to joining Ricardo, he was
managing director of a
subsidiary of Powergen
plc. He has also gained
consulting experience in
both listed and private
companies. He is a graduate
of the Harvard Business
School. Dave was appointed
non-executive director
of Sutton and East Surrey
Water plc on 1 September
2014.
Peter Gilchrist
CB
Non-Executive Director,
Senior Independent Director
and Chairman of the
Remuneration Committee
Peter Gilchrist was
appointed Non-Executive
Director on 1 December
2010, Chairman of the
Remuneration Committee
on 14 November 2013
and Senior Independent
Director on 1 July 2015.
Peter’s military career in
the British Army spanned
almost four decades and he
has previously been Master-
General of the Ordnance
and an executive director in
the Defence Procurement
Agency. Peter is currently
non-executive chairman
of Enterprise Control
Systems Limited and is a
non-executive director of
Orcogen Limited.
Malin Persson
MSc
Non-Executive Director
Malin Persson was
appointed Non-Executive
Director on 4 January
2016. Malin held a number
of senior executive roles
during her employment
by the Volvo Group
between 1995 and 2012.
She is an elected member
of the Royal Swedish
Academy of Engineering
Sciences and has an MSc
in Industrial Engineering
and Management from
the Chalmers University of
Technology in Gothenburg.
Creating a world fit for the future 77
Sir Terry Morgan CBE – Chairman
Corporate governance statement
CHAIRMAN’S OVERVIEW
I am pleased to introduce the Corporate Governance
Statement for the year ended 30 June 2019. Governance is
an important contributor to the success of Ricardo and the
Board is committed to ensuring that appropriate standards of
governance are maintained throughout the Group.
This report sets out the ways in which we comply with good
corporate governance principles. It describes how the Board
and its Committees' work, and also our approach to risk
management and internal control.
The Board recognises the importance of considering the
Company’s responsibilities and duties to both its shareholders
and broader stakeholder group, and this has been at the heart
of our culture and decision-making process for many years. The
Directors’ duties under section 172 of the Companies Act 2006,
to promote the success of the Company, help to underpin the
good governance which is at the centre of what we do, and
the Board receives regular briefings and updates on corporate
governance at its Board and Committee meetings.
UK CORPORATE GOVERNANCE CODE
The Board confirms that the Company has complied with the
provisions of the UK Corporate Governance Code 2016 (‘the
Code’) throughout the year ended 30 June 2019. The Board has
reviewed the requirements of the UK Corporate Governance
Code 2018 and will fully report on compliance with that Code in
the year ending 30 June 2020.
This report describes how the Company has applied the
principles and standards set out in the Code during the year and
sets out our activities relating to the main sections of the Code:
78 Ricardo plc Annual Report & Accounts 2018/19
As part of the Board’s succession planning, during the year our
Nomination Committee conducted searches for two additional
Non-Executive Directors following the announcement of Peter
Gilchrist’s forthcoming retirement. I am delighted to welcome
both Russell King and Jack Boyer OBE, who joined the Board
on 5 September 2019.
After careful consideration of the responsibilities of the
Non-Executive Directors, the Nomination Committee
recommended that Russell King be appointed Chairman of the
Remuneration Committee, Malin Persson will be appointed
Senior Independent Director and following my decision to
stand down as Chairman of the Nomination Committee, Laurie
Bowen will be appointed to this role. All of these changes will
take effect at the close of the AGM in November 2019.
Sir Terry Morgan CBE
Chairman
A. Leadership;
B. Effectiveness;
C. Accountability;
D. Remuneration; and
E. Relations with shareholders.
The Code and associated guidance are publicly available
on the Corporate Governance and Stewardship page of the
Financial Reporting Council’s website, www.frc.org.uk/directors/
corporate-governance-and-stewardship.
SECTION A: LEADERSHIP
A1: The role of Ricardo’s Board
Our role is to provide entrepreneurial leadership and we
recognise that we are collectively responsible for the long-term
success of the Group.
We set strategy and oversee its implementation by the
executive team. We assess business opportunities and seek
to ensure that appropriate controls are in place to assess and
manage risk. We are responsible for reviewing the executive
team’s performance and we oversee senior-level succession
planning within the Group.
We agree the Company’s values and standards and ensure
that the Company’s obligations to its shareholders are met.
We have a formal schedule of matters reserved for our approval
which are not delegated to the executive team. These include:
• Strategy;
• Acquisitions and disposals of businesses (above a certain size);
• Annual budgets;
• Capital expenditure (above a certain amount);
• Financial results;
• Overseeing systems of internal control, governance and risk
management;
• Dividends; and
• Appointment and removal of Directors and the Company
Secretary.
Our Board has Nomination, Audit and Remuneration
Committees and we delegate certain responsibilities to them.
These Committees comprise our independent Non-Executive
Directors (save for the Nomination Committee, which includes
the Chief Executive Officer) and all play a key role in supporting
the Board. The full schedule of matters reserved for the Board,
together with the written terms of reference for each Committee
which are reviewed annually, are available on our website,
www.ricardo.com or on request from the Company Secretary.
The Board in financial year 2018/19
There are seven scheduled Board meetings per year, and
otherwise as required. Details of attendance by Board and
Committee members at scheduled meetings are shown in the
table below.
If any Director is unable to attend a meeting, they discuss their
views and comments with the relevant Chairman in advance, so
that their position can be represented at the meeting.
Number of scheduled meetings in the year
Number attended by each member:
Dave Shemmans
Ian Gibson
Mark Garrett
Sir Terry Morgan CBE
Peter Gilchrist CB
Bill Spencer
Laurie Bowen
Malin Persson
Corporate governance statement
Board meetings focus on driving Ricardo’s strategy, developing
strong leadership, succession planning, reviewing financial
business performance, monitoring risks and protecting the
strength of our relationships with clients, employees and other
stakeholders. Our agendas allow time for debate and long-term
strategic discussion. Our forward planner gives Board members
visibility of what is on future agendas for their consideration.
A number of the key matters considered by the Board during
the year under review are set out in the table below:
Meeting in
FY 2018/19
July 2018
Significant matters under review
• FY 2018/19 budget approval;
• Risk management and internal control; and
• Matters reserved for the Board and Committees’
February 2019
November 2018
terms of reference
September 2018 • Preliminary results and Annual Report;
• Final dividend; and
• Annual General Meeting (‘AGM’)
• Strategy; and
• Board objectives
• Interim results and Interim Report;
• Interim dividend;
• Key performance indicators;
• Human resources; and
• Insurances and health, safety and environment (‘HSE’)
• Treasury
• FY 2019/20 divisional budget presentations
April 2019
June 2019
In each meeting the Board receives reports from the Chief
Executive Officer and the Chief Financial Officer together with
reports and updates on health and safety as well as potential
acquisition and disposal activities.
During the year under review, Mark Garrett and the Non-
Executive Directors visited our operations in China and Hong
Kong and had the opportunity to meet with some of our key
clients. The visit was very informative and gave the Non-Executive
Directors greater insight into our operations in those territories
and the expectations of our customers.
Board objectives
The Company is confident that the Board and the wider
leadership team have the experience and track record to meet the
Company’s aims of delivering long-term growth and successfully
managing the challenges of an expanding international group.
Board
meetings
Committee meetings
Remuneration
Audit
Nomination
7
7
7
7
7
7
7
7
7
3
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-
-
-
3
3
3
3
4
-
-
-
4
4
4
4
4
1
1
-
-
1
1
1
1
1
Creating a world fit for the future 79
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Corporate governance statement
The Board sets its specific future objectives at the end of
each financial year and these reflect the particular focus of the
Company in the year ahead. Progress against each objective
is tracked by the Company Secretary and reviewed with the
Chairman and the Board at the mid-year point.
Induction
There is a written framework for the full, formal and tailored
induction of new directors, which includes site visits, meetings
with senior management and advisors, and the provision of
corporate documentation to facilitate their understanding of our
business, its operations, key markets and risks.
A2: Division of responsibilities
There is a clear division of responsibilities between the Chairman
and the Chief Executive Officer, which is documented, clearly
understood and approved by the Board.
Sir Terry is primarily responsible for leading the Board
and ensuring its effectiveness. Dave Shemmans has direct
responsibility for the Group on a day-to-day basis and is
accountable to the Board for the financial and operational
performance of the Group.
Dave Shemmans chairs the Executive Committee, which
meets formally at least three times a year. The Executive
Committee is primarily responsible for developing and
implementing our corporate strategy and policies.
The responsibilities of the Senior Independent Director are also
documented and include the provision of an additional channel
of communication between our Chairman and the Non-Executive
Directors. The Senior Independent Director also provides an
additional point of contact for our shareholders should they have
concerns that communication through normal channels has failed
to resolve or where these contacts are inappropriate.
A3: The Chairman
Sir Terry sets the Board agenda in consultation with the Chief
Executive, other Board members and the Company Secretary.
On appointment as Chairman in October 2014, the Board
considered Sir Terry to be independent in accordance with the
Code provisions.
A4: Non-Executive Directors
Peter Gilchrist has been the Senior Independent Director and
Chairman of the Remuneration Committee throughout the
year under review. Bill Spencer has been the Chairman of the
Audit Committee throughout the year under review. All current
Non-Executive Directors held office throughout the year under
review, except for Russell King and Jack Boyer OBE who were
appointed on 5 September 2019 (see Section B1).
On a number of occasions during the year, the Chairman
met the other Non-Executive Directors without the attendance
of the Executive Directors. There were several other occasions
during the year when discussions between various Directors
took place on an informal basis. In addition to formal Board
meetings, the Chairman maintains regular contact with the other
Directors to discuss specific issues.
80 Ricardo plc Annual Report & Accounts 2018/19
SECTION B: EFFECTIVENESS
B1: Board composition and independence
As at 30 June 2019, our Board comprised five Non-Executive
Directors and three Executive Directors as follows:
Dave Shemmans
Ian Gibson
Mark Garrett
Sir Terry Morgan CBE
Peter Gilchrist CB
Bill Spencer
Laurie Bowen
Malin Persson
Chief Executive Officer
Chief Financial Officer
Chief Operating Officer
Non-Executive Chairman (independent at time
of appointment)
Independent Non-Executive Director, Senior
Independent Director and Chairman of the
Remuneration Committee
Independent Non-Executive Director and
Chairman of the Audit Committee
Independent Non-Executive Director
Independent Non-Executive Director
Biographies of Directors, giving brief details of their experience
and other commitments, are set out on pages 76 and 77.
The wide-ranging experience and backgrounds of the Non-
Executive Directors enable them to debate and constructively
challenge management in relation to the strategy and
performance of the Group.
On 6 September 2019, the Company announced that Peter
Gilchrist intended to step down as Non-Executive Director,
Senior Independent Director and Chairman of the Remuneration
Committee at the close of the AGM on 14 November 2019. On
the same date, the Company announced that Russell King and
Jack Boyer OBE had been appointed as Non-Executive Directors
to the Board. It is intended that Russell King will be appointed as
Chairman of the Remuneration Committee and Malin Persson as
Senior Independent Director, at the close of the AGM on
14 November 2019.
Russell King is chairman
of Hummingbird
Resources plc, and senior
independent non-
executive director and
remuneration committee
chair of Spectris plc.
Russell is due to retire
from Spectris plc at the
close of its AGM in May
2020. Russell is also a
non-executive director of BDO LLP and Interserve plc, which is
in administration. Russell will resign from his role at Interserve plc
when the administration process has been completed.
Russell King
Russell was senior independent non-executive director of
Aggreko plc for ten years to 2017. Between 2010 and 2013, Russell
was a senior advisor to RBC Capital Markets on metals and
mining. Prior to this, Russell served as chief strategy officer at
Anglo American plc.
Jack Boyer is a non-
executive director of TT
Electronics plc where
he is a member of the
audit, remuneration and
nomination committees.
He chairs the board of
trustees of the University
of Bristol and is a non-
executive director of the
Henry Royce Institute for
Advanced Materials.
Jack Boyer OBE
Jack holds degrees from Stanford University (BA (Hons)), the
London School of Economics (MSc) and INSEAD (MBA). Jack was
awarded an OBE in 2015 for services to Science and Engineering.
The Board has concluded that Sir Terry Morgan, Laurie Bowen,
Malin Persson, Bill Spencer, Russell King and Jack Boyer OBE are
independent in character and judgement.
The Company has procedures in place to ensure that the
Board’s power to authorise conflicts of interest is operated
effectively and that such procedures have been followed during
the year under review.
B2: Appointments to the Board
Our Board has continued to discuss matters relating to
succession planning and talent management for leadership
succession.
Following the year under review, there were two additional
appointments to the Board in accordance with our rigorous
and transparent procedures, together with a re-assignment of
responsibilities amongst the Non-Executive Directors.
Non-Executive Directors are appointed for specified terms of
three years, which can be extended by agreement provided that
the individual’s performance continues to be effective.
More details are described in the Nomination Committee
report on page 84.
Diversity
Our Board and its Committees are committed to promoting
equality of opportunity for all employees and job applicants, free
from all forms of discrimination. Ricardo is an inclusive employer
and values diversity of skills, knowledge, background, industry,
international experience and gender in its employees and aims
to recruit the best person for the role in all its positions across
the Group.
Our Nomination Committee appreciates that a diverse range
of backgrounds is an important part of succession planning at
all levels in the Group. Our Nomination Committee continually
monitors tenure profile and is very conscious of the need to
continue to promote diversity at Board level and throughout
the Group. Upon engagement of external search consultants,
our Board requires that full account of all aspects of diversity are
considered in preparing candidate lists.
The Board recognises that the appointment of our two
additional Non-Executive Directors has diluted female gender
diversity. Careful consideration of this impact was undertaken by
Corporate governance statement
the Nomination Committee and the Board before appointment
and it was determined that in accordance with our aim to recruit
the best person for the role, it was appropriate to appoint Russell
King and Jack Boyer OBE as Non-Executive Directors. As part of
its determination, the Nomination Committee considered that
these appointments should be viewed in relation to its overall
responsibility for succession planning of the Board.
In addition, the Committee recommended to the Board
that Laurie Bowen and Malin Persson should be appointed to
the roles of Chair of the Nomination Committee and Senior
Independent Director, respectively, to reflect their contributions
and status on the Board.
The Board remains committed to promotion of diversity at
all levels within the Group and will report on this further in
future years.
Details of female representation elsewhere within the Group
are set out on page 36.
B3: Commitment
The Chairman and the Non-Executive Directors have provided
assurances to the Board that they remain fully committed to their
respective roles and can dedicate the necessary amount of time
to attend to the Company’s affairs.
During the year, Malin Persson reduced her non-executive roles
and now holds five other non-executive appointments.
The Board is satisfied that each of the Non-Executive Directors
is able to devote sufficient time to the Company and its affairs, to
effectively discharge their duties.
Letters of appointment for the Non-Executive Directors are
available for inspection by shareholders at each AGM and during
normal business hours at the Company’s registered office.
Executive Directors must obtain the prior consent of the Board
before accepting a non-executive directorship in any other
company. Executive Directors may retain the fees from any such
directorship. Two Executive Directors, Dave Shemmans and
Mark Garrett, held non-executive directorships during the year
under review.
B4: Professional development
The Board and its Committees are kept informed through the
Company Secretary of corporate governance and relevant
regulatory developments as they arise.
In addition, we keep ourselves informed about the Group’s
activities through a structured programme of presentations from
each of the businesses within the Group and from a number
of Group functional leaders. During the year under review we
received presentations from the Group HR Director and the
Group Risk Manager & Head of Internal Audit, together with
specific presentations on key projects for the business.
There are regular presentations to the Board from employees
of the Group who have been identified by their peers and
managers as potential high achievers.
Directors are updated continually on the Group’s business with
information on monthly financial performance, and by means of
additional presentations on matters including insurance, treasury,
health and safety, and environmental risk management.
Creating a world fit for the future 81
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B7: Election and re-election
In accordance with the Company’s Articles of Association and
the Code, all Directors will retire at the AGM in November 2019
and, being eligible, will offer themselves for election or
re-election, except for Peter Gilchrist.
The Board recommends that each of the Directors should
be elected or re-elected, as appropriate, by the shareholders
because each continues to be effective and demonstrates
commitment to the role that each of them performs.
SECTION C: ACCOUNTABILITY
This Report provides shareholders with a clear assessment of the
Group’s position and prospects, supplemented, as required, by
other periodic financial and trading statements.
C1: Financial and business reporting
The Statement of Directors’ Responsibilities for preparing the
Annual Report, the Directors’ Remuneration Report and the
financial statements in accordance with applicable law and
regulations are set out on page 113.
The Group’s business model is set out within the Strategic
Report on pages 21 and 26.
The Directors’ statement relating to going concern and the
Viability Statement are set out on pages 128 and 47, respectively.
C2: Risk management and internal control
Each year, the Board undertakes a comprehensive review of the
principal risks and uncertainties facing the Group and how those
risks may impact the Group’s prospects.
Overall responsibility for systems of internal control rests with
the Board. The Board’s arrangements for the application of risk
management and internal control principles are detailed on
pages 44 to 46.
C3: Audit Committee and auditors
The Board has delegated oversight of the relationship with
the Group’s and the Company’s external auditors to the Audit
Committee. Their work is outlined in the Audit Committee
report on pages 85 to 87.
Corporate governance statement
The Audit Committee is routinely briefed on accounting
and technical matters by senior management and by the
external auditors.
The Remuneration Committee receives updates on
remuneration trends and market practices as part of its
regularly scheduled business, and during the year under
review FIT Remuneration Consultants LLP provided updates
on the proposals and reporting requirements for executive
remuneration.
Training for Directors is available as required and is provided
mainly by way of external courses. A register of the training
that individual Directors have undertaken is maintained by the
Company Secretary and is reviewed by the Chairman individually
with each Director as part of the Board evaluation process.
The Board considers that it is the primary responsibility of each
Director to identify the individual training and development
needs that he or she requires.
B5: Information and support
The Chairman is responsible for ensuring the Directors
receive accurate, timely and clear information, with Board and
Committee papers being circulated sufficiently in advance
of meetings.
All Directors have access to the advice and services of the
Company Secretary and each Director has been informed
that, in the furtherance of his or her duties, they are entitled to
seek independent professional advice at the expense of the
Company. The Company arranges appropriate insurance cover
in respect of legal actions against its Directors. In addition, the
Company has entered into indemnities with its Directors as
described on page 110.
B6: Board evaluation
The Board undertakes a formal review of its performance and
that of its Committees each year. The externally facilitated
review conducted in the 2016/17 financial year concluded
that the Board was strong and effective, with each Director
actively contributing to the effectiveness of the Board and the
Committees of which he or she was a member during that year.
Following the external review, the Board set itself
improvement actions and objectives. In 2017, the Board reviewed
the evaluation findings, agreed improvement actions and
noted that progress had been made in all areas. The Board also
recognised that succession planning is an area that continues to
require focus.
Additionally, Ricardo’s external auditors and remuneration
consultants provide an evaluation of the performance of our
Audit and Remuneration Committees, respectively.
The Nomination Committee has recommended, and the
Board has decided, to conduct a further external evaluation
during the next financial year and this will be reported on in the
Annual Report for the year ending 30 June 2020.
82 Ricardo plc Annual Report & Accounts 2018/19
Corporate governance statement
E2: Ricardo’s Annual General Meeting
The Company’s Annual General Meeting is an opportunity to
meet private investors. It is intended that all Directors of the
Company will be available to answer questions at the 2019 AGM.
The Notice of Meeting sets out the resolutions being
proposed at the AGM on 14 November 2019 at 10:00am.
Shareholders can vote separately on each proposal.
Last year, all resolutions were passed with votes ranging from
83.48% to 99.96%. Shareholders unable to attend the AGM are
encouraged to vote in advance of the meeting.
The AGM in November 2018 was attended by all Directors in
office at the time of the meeting. The Directors encourage the
participation of all shareholders, including private investors, at
the AGM and as a matter of policy the level of proxy votes (for,
against and vote withheld) lodged on each resolution is declared
at the meeting and displayed on the Company’s website.
Ricardo’s website, www.ricardo.com, contains a wealth of
information, including:
• Latest Ricardo news, stock exchange announcements and
press releases; and
• Annual reports, interim reports and investor presentations.
The Corporate Governance Statement was approved by the
Board of Directors on 11 September 2019 and signed on its
behalf by:
SECTION D: REMUNERATION
Please refer to the Directors’ Remuneration Report on pages 88
to 109 for further information, and in particular:
D1: Level and components of remuneration
Please refer to pages 90 to 101.
D2: Procedure
Please refer to pages 102 to 109.
The Non-Executive Directors have never been employees
of the Company, nor have they participated in any of the
Company’s share schemes, pension schemes or bonus
arrangements.
The Non-Executive Directors receive no remuneration from
the Company other than the Directors’ fees disclosed, and the
reimbursement of travel expenses. Their fees are determined
by the Board as a whole on the recommendation of the Chief
Executive Officer.
No Director is involved in deciding their own fees.
SECTION E: RELATIONS WITH SHAREHOLDERS
E1: Shareholder dialogue
The Chief Executive Officer and the Chief Financial Officer
regularly meet with institutional shareholders to foster a mutual
understanding of objectives, answer their questions and to keep
them updated on our performance and plans.
These meetings range from one-to-one discussions to group
presentations and investor conference calls following our results
announcements. Any presentations provided in these meetings
are uploaded to our website and comments are fed back to us.
In addition, the Senior Independent Director and the
Chairman of the Audit Committee are available for discussions
with major shareholders, if required.
Sir Terry Morgan CBE
Chairman
The Chairman also looks to shareholder groups’ annual voting
guidelines to better understand their policies on governance
and voting.
For an independent view, Investec and Liberum, the capital
markets advisory firms, provide us with regular reviews of major
investors’ views on company management and performance.
Surveys of shareholder opinion are normally carried out
following announcements of results and are circulated to the
Board.
As required by the Code, the Board considers that its Non-
Executive Directors, including the Senior Independent Director,
have a good level of understanding of the issues and concerns
of major shareholders.
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Creating a world fit for the future 83
Nomination committee report
RESPONSIBILITIES
The Committee:
• Evaluates the balance of skills, knowledge and experience of
the Board;
• Monitors the leadership needs and succession planning of the
Company;
• Considers the training needs of the executive and non-
executive members;
• Regularly reviews the structure, size and composition of the
Board; and
• Makes recommendations to the Board for executive and non-
executive appointments.
Before such recommendations are made, descriptions of the roles
and skills required in fulfilling these roles are prepared for each
particular appointment. To attract suitable candidates, appropriate
external advice is taken, and interviews conducted by at least two
members of the Nomination Committee to ensure a balanced view.
As announced on 6 September 2019, Peter Gilchrist will be retiring
from the Board at the close of the AGM in November 2019. After
careful consideration, the Nomination Committee recommended
the appointments of Russell King and Jack Boyer OBE as
Non-Executive Directors.
As a result of Peter’s forthcoming departure, the Nomination
Committee took the opportunity to review the responsibilities
of Non-Executive Directors to the Board and with effect from
the close of the AGM, Sir Terry Morgan will step down as Chair of
the Nomination Committee and Laurie Bowen will be appointed
in his place. Russell King will take on the role of Chairman of the
Remuneration Committee and Malin Persson will be appointed
Senior Independent Director.
The search for new Non-Executive Directors during the year
was managed with the assistance of recruitment consultants, the
Inzito Partnership, who have signed up to the voluntary Code of
Conduct for executive search firms. The Inzito Partnership provided
a shortlist of candidates who were interviewed by Dave Shemmans
and Sir Terry Morgan. Laurie Bowen, Bill Spencer and Malin Persson
then interviewed shortlisted candidates before it was unanimously
agreed to offer Russell King and Jack Boyer OBE the roles. Both new
Non-Executive Directors will undertake an extensive induction
programme to ensure a rounded understanding of the business
and our ambitions. The Inzito Partnership have no other connection
with the Company.
When an appointment of a Non-Executive Director is made, a
formal letter is sent clearly setting out what is expected regarding
time commitment, Committee membership and involvement
outside of Board meetings. Chosen candidates are required to
disclose to the Board any other significant commitments before
appointments can be ratified.
Non-Executive Directors, including the Chairman, are subject to
rigorous review when they continue to serve on the Board for any
term beyond six years.
Sir Terry Morgan CBE – Chairman of the Nomination Committee
CHAIRMAN’S OVERVIEW
The primary objectives of the Committee are to support
the Board in fulfilling its responsibilities to ensure that,
firstly, there are formal, rigorous and transparent processes
in place for the appointment of new Directors, both to the
Board and to senior management positions, and, secondly,
that there are effective, deliverable and well thought-
through succession and contingency planning processes in
place across the Group for all key positions.
A key focus during the year has been the appointment of
additional Non-Executive Directors. These appointments
were managed in conjunction with recruitment
consultants, the Inzito Partnership. Further details of this
process are included in the Responsibilities section below.
In addition, we have re-assigned responsibilities amongst
the Non-Executive Directors for the roles of two of our
Committees and the role of Senior Independent Director.
In the forthcoming year we will continue to focus on talent
management and succession planning for management
below Board level.
Sir Terry Morgan CBE
Chairman of the Nomination Committee
COMPOSITION
During the year under review, the Nomination Committee, which
is chaired by Sir Terry Morgan, comprised the independent Non-
Executive Directors Peter Gilchrist, Laurie Bowen, Malin Persson
and Bill Spencer, together with the Chief Executive Officer, Dave
Shemmans. The Committee has one scheduled meeting per
year, which is supplemented by ad hoc meetings as necessary,
and informal meetings between the Committee members.
The Chairman of the Committee is the Chairman of the Board,
Sir Terry Morgan, except when a new Chairman of the Board is
being sought, in which case it is the Senior Independent Director.
84 Ricardo plc Annual Report & Accounts 2018/19
Nomination committee report
SUCCESSION PLANNING
Name
Date of appointment
Tenure (years)
Dave Shemmans
Ian Gibson
Mark Garrett
Sir Terry Morgan CBE
Peter Gilchrist CB
Laurie Bowen
Malin Persson
Bill Spencer
Jack Boyer OBE
Russell King
April 2005
July 2013
July 2008
January 2014
December 2010
July 2015
January 2016
April 2017
September 2019
September 2019
14
6
11
5
8
4
3
2
-
-
Following completion of Malin Persson’s first three years
of service, we reviewed her performance and confirmed
her continued independence as a Non-Executive Director.
Accordingly, the Committee unanimously recommended to the
Board the renewal of her appointment. The Board approved this
renewal at the appropriate time.
The Committee has spent time looking at succession planning
for the Executive Directors as well as for the Board over the
medium term. We have also discussed talent management and
succession planning for the top-performing senior managers
within the business.
Audit committee report
Bill Spencer – Chairman of the Audit Committee
CHAIRMAN’S OVERVIEW
I am pleased to present to you my second report as
Chairman of the Audit Committee since joining the Board
in 2017.
This year the Committee welcomed KPMG LLP (‘KPMG’)
as the external auditors of the Group, following their
appointment at the 2018 Annual General Meeting (‘AGM’).
I would like to thank Michael Harper and his team for
ensuring a smooth transition in this first year of audit.
The Committee has been actively engaged in risk
management to provide appropriate challenge and
guidance. It has also evaluated the effectiveness of the
internal control environment to ensure the integrity of the
Group’s financial reporting.
I hope that you will find this report useful and I would
welcome any comments.
Bill Spencer
Chairman of the Audit Committee
COMPOSITION
I chair the Audit Committee, which during the year under review
also comprised the independent Non-Executive Directors, Peter
Gilchrist, Laurie Bowen and Malin Persson. The competence and
experience of all the members of the Audit Committee is set out
on pages 76 and 77.
As the Committee’s Chairman and as is considered desirable
by the Financial Reporting Council’s Guidance on Audit
Committees, I have recent and relevant financial experience and a
professional accountancy qualification.
As set out on page 82, the performance of the Audit
Committee has been evaluated and is considered to be effective.
The Committee convenes at three scheduled meetings
each year and other ad hoc meetings, as required. Details of
attendance at meetings held during the financial year are set out
on page 79. The Chairman, Executive Directors, the Group’s Head
of Internal Audit and the Company’s external auditors all have
standing invitations to attend all Committee meetings.
RESPONSIBILITIES
The Committee is established by, and is responsible to, the
Board. As authorised by the Board, the Committee has obtained
all necessary documentation and information it required from
officers or employees of the Company, as well as external
professional advice. In order to carry out its responsibilities
during the year, the Committee undertook the following
activities:
• Assessed the Group’s risk profile, as well as its appetite for risk
on behalf of the Board, and evaluated the effectiveness of
the Group’s risk management and internal control systems,
together with the policies and procedures in relation to ethics,
whistleblowing, fraud and bribery prevention;
Creating a world fit for the future 85
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Audit committee report
• Monitored the key risks to the Group in respect of data and
cyber security and evaluated the effectiveness of its control
environment;
• Considered significant matters arising from internal audits
performed during the year, evaluated the effectiveness of the
internal audit function, and reviewed the scope and available
resource for the internal audit plan in the following year to
ensure that it is appropriate;
• Reviewed the scope and planning of the external audit, and
evaluated the external auditors’ remuneration, effectiveness,
independence and objectivity, including consideration of the
provision of non-audit services;
• Considered separate reports prepared by the Chief Financial
Officer and external auditors on financial reporting and
internal control matters as part of the interim review and
annual audit processes;
• Assessed the results, on behalf of the Board, of the application
of agreed assumptions to re-confirm the continued operational
and financial viability of the Group for a period of three years
from the date of this report;
• Reviewed the significant financial reporting matters,
judgements and estimates, and changes in accounting policies
applicable in the preparation of both the Group’s interim and
year-end consolidated financial statements, which included the
transition to IFRS 9 Financial Instruments and
IFRS 15 Revenue from Contracts with Customers, prior to
submission to the Board for approval; and
• Evaluated the content of the Annual Report & Accounts as
a whole and assessed the processes in place to assure its
integrity, to advise the Board on whether the information
presented is fair, balanced and understandable, and whether
it contains the information necessary for shareholders to
assess the Group’s position and performance, business model
and strategy.
Risk management
The Committee has monitored the Group’s risk management
processes and internal control systems as part of its role to
oversee the Group’s approach to risk management and with
due consideration to the principal risks and uncertainties facing
the Group.
During the year, the Committee commissioned the
implementation of an independent hotline to reinforce
the Group’s policies and procedures in relation to ethics,
whistleblowing, and the prevention of fraud and bribery.
Significant financial reporting matters
The Committee received and considered reports from the Chief
Financial Officer in relation to the critical accounting judgements
and key sources of estimation uncertainty. Following discussions
with senior management and the external auditors, the
Committee approved the disclosure as set out in Note 1(c) to the
financial statements on pages 129 and 130.
The Committee considered the following significant financial
reporting matters, judgements and estimates in approving the
financial statements for the year ended 30 June 2019:
86 Ricardo plc Annual Report & Accounts 2018/19
Considerations of the risk and impact of Brexit
Management’s perception of the risks associated with Brexit have
been considered as part of the Committee’s bi-annual risk profile
review. The risks, their potential impacts and the mitigating actions
taken are set out in the Group’s Principal Risks and Uncertainties on
page 45.
Although the potential impacts of the perceived risks of Brexit
are inherently uncertain and the full range of identifiable risks
and possible outcomes cannot be known, severe but plausible
downside scenarios to reflect a significant downturn in levels of
trading have been factored into the assessment of the Group’s
continued viability. In addition, the actuarial assumptions used
to value its retirement benefit obligations at the year-end reflect
the level of economic uncertainty of Brexit as at the reporting
date. While no business can fully prepare for, or mitigate against,
the potential impacts of Brexit, the Committee is satisfied that
appropriate considerations of the perceived risks associated with
Brexit have been made, together with reasonable actions taken to
mitigate those risks, where possible.
Revenue recognition on fixed price contracts
The Group recognises a significant proportion of its revenue within
Technical Consulting from the supply of services under fixed price
contracts, which may span a number of reporting periods. The
identification and separate accounting of distinct performance
obligations within the context of a contract is a critical judgement in
recognising revenue.
The percentage of completion basis is applied to estimate the
extent to which revenue is recognised and is calculated as actual
costs incurred as a proportion of total forecast contract costs to
complete. This method places importance on the accuracy of
forecast costs to complete, including the outcome of contractual
and technical risks, and the extent to which variation requests are
recognised for proposed changes in agreed schedule, price or scope.
Contractual and technical risks are assessed at the proposal stage
of a project and regularly reviewed throughout its life cycle. A risk
rating is determined prior to project approval in accordance with the
Group’s authority limits, including Board approval, where appropriate.
Projects in progress are assessed on a timely basis against
quantitative and qualitative criteria. High risk and high value projects
with significant performance challenges are monitored by senior
management and reported to the Board.
A summary of the judgements and estimates taken by
management to assess the extent to which these contract assets are
recoverable was reviewed by the Committee at the February and
September meetings and the positions taken are considered to be
appropriate.
The Committee is satisfied that the Group’s policies and
procedures have been followed to reflect management’s best
estimate of revenue recognised at the reporting date and that no
individual judgement or estimate is expected to have a materially
different outcome.
Changes in these estimates may impact revenue recognition and
the actual outcome may differ to the estimate made at the reporting
date. Further detail is set out in Note 1(c) to the financial statements
on page 130.
Defined benefit obligation
The Company operates the defined benefit Ricardo Group
Pension Fund (‘RGPF’). The accounting basis of the RGPF is
exposed to changes in the value of its assets and liabilities. The
liabilities of the RGPF are also sensitive to changes in actuarial
assumptions, on which management takes professional advice.
Further detail is set out in the financial statements in Note 1(c) on
page 130 and Note 24 on pages 158 to 160.
The Committee is satisfied that the assumptions were
reviewed by senior management and that the value of the
RGPF’s liability reflects the best estimate at the reporting date.
Impact of new accounting standards
Accounting standards IFRS 9 Financial Instruments and IFRS 15
Revenue from Contracts with Customers became effective for
the first time from 1 July 2018. The transitional impact of these
standards and the changes required to accounting policies
have been reviewed by the Committee and are considered to
be appropriate. Further detail is given in Note 38 to the financial
statements on pages 170 to 172.
IFRS 16 Leases became effective for the Group from 1 July 2019
and will be reported in next year’s financial statements. During
the year management completed its initial impact assessment
of the standard and disclosure has been provided, the expected
impact of which has been reviewed by the Committee and is
considered to be appropriate. Further detail is set out in Note 1(x)
to the financial statements on pages 135 and 136.
Internal audit
The internal audit function is accountable to the Committee, and
as set out in the Strategic Report on page 44, is considered to be
a key function for effective risk management.
Internal audit is led and resourced by suitably skilled and
experienced staff from head office or parts of the Group
independent from the business or function being audited.
Where relevant, external consultants are used to supplement
internal resources when specialist knowledge is required.
This approach ensures independence in the process, the
identification of relevant findings and recommendations, and
the sharing of best practice around the Group.
All internal audit reports submitted during the year were
reviewed by the Committee and the status of each remedial
action is tracked to completion to ensure appropriate resolution.
Meetings are held with the Group’s Head of Internal Audit
without the presence of management.
The Committee also monitored the effectiveness of the
Group’s internal audit function including the approval of the
scope and resources required to carry out work to be performed.
Audit committee report
External audit
As outlined in last year’s report, the Committee led an audit
tender process that culminated in the appointment of KPMG as
the Group’s external auditors for the year ended 30 June 2019.
Non-audit services
The Board’s policy is that the provision of permissible non-
audit services may only be undertaken by KPMG in limited
circumstances and is subject to a cumulative cap. In order
to remove the possibility of a perceived conflict of auditor
objectivity and independence, KPMG has agreed with the
Committee that no permissible non-audit services will be
provided to Ricardo other than those closely related to the audit
of the Group, such as the interim review.
Fees for non-audit services paid to the external auditors
during the year were 9% of KPMG’s audit fee (FY 2017/18: 29% of
PwC’s audit fee). The ratio of audit and non-audit fees and the
nature of non-audit fees are disclosed in Note 6 to the financial
statements on page 140. Given the nature and scale of the
services provided by KPMG, the Committee concluded that
these services did not cause any concerns regarding KPMG’s
objectivity or independence.
There are limited instances where Ricardo enters into business
relationships or joint arrangements with KPMG to pursue
commercial opportunities, either as a prime contractor,
sub-contractor or as part of a consortium, with either party
or a third party being the project manager. These business
relationships are considered acceptable to the extent that they
remain immaterial to both organisations and do not compromise
the auditors’ independence.
Independence and effectiveness
Both the Board and KPMG have safeguards in place to avoid the
possibility that the auditors’ objectivity and independence could
be compromised. The Committee supports KPMG in having the
necessary professional scepticism in its role. KPMG also provides
the Committee with information about policies and processes
for maintaining its independence.
The Committee confirms that during the year it has
maintained formal and transparent arrangements for
considering corporate reporting, risk management and
internal control and for maintaining an appropriate relationship
with KPMG.
The quality and effectiveness of KPMG is assessed after the
completion of each audit and is based upon their audit findings
and responses to questions from the Committee, together
with input from senior management and finance personnel.
The Committee also met with the audit partner without
management being present.
The Committee has concluded that KPMG are operating
effectively and recommended to the Board that their
re-appointment be proposed to shareholders at the 2019 AGM.
Creating a world fit for the future 87
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Peter Gilchrist CB – Chairman of the Remuneration Committee
Directors’ remuneration report
PART 1 – CHAIRMAN’S OVERVIEW
Dear Shareholder,
Ricardo, led by Dave Shemmans and his leadership team,
has remained steadfast to its long-term business strategy
in an environment which continues to be uncertain and
unpredictable.
Despite the challenges, the international expansion of the Group
has continued with the acquisitions of Transport Engineering,
which now forms part of Ricardo Rail, and PLC Consulting,
which completed after the end of the 2018/19 financial year
and now forms part of Ricardo Energy & Environment. Both
these businesses establish Ricardo in Australia, which is a key
market for us. The order book has increased and the pipeline
of business is increasingly diverse. This helps us to manage the
difficult operating conditions affecting the European and US
Automotive businesses in Technical Consulting. Conversely,
performance for the year was particularly good in Energy &
Environment and in Performance Products.
Pay outcomes and performance for FY 2018/19
Despite our successes, the Group’s adjusted underlying Profit
Before Tax (‘PBT’) for the year, on which 60% of the Executive
Directors’ total bonus opportunity is based, was £36.7m and
below the threshold we set for bonus purposes. Performance
against the net debt measure was between threshold and
target. The performance assessment for each of the Executive
Directors against their personal targets, which are all designed
to support Ricardo’s long-term sustainable success, ranged from
70% to 90%. The consequence was that the bonuses for the
Executive Directors range from 21.5% to 31.4% of salary. Half the
value of the bonuses earned must be deferred into shares for
three years, with a corresponding award of performance shares,
88 Ricardo plc Annual Report & Accounts 2018/19
which we call the bonus-linked shares, to be made in October
2019 – see page 89.
The Directors’ Remuneration Report explains this in more
detail and I hope that our shareholders will find the additional
disclosure this year in respect of the personal objectives helpful
and that it will be easier to see each individual’s performance
assessment.
In October 2018, awards under the Long-Term Incentive Plan
(‘LTIP’) made during 2015 and the bonus-linked shares that were
granted at the same time, vested at a level of approximately
40% of maximum – see page 95.
Basic salaries for the Executive Directors were increased from
1 January 2019 by between 2.5% and 4% against a Group-wide
budget of 3%.
Increasing the focus on profit
We expect to make an award under the LTIP in October 2019. As
the Directors’ Remuneration Report explains, the Remuneration
Committee (the ‘Committee’) for now is of the view that relative
total shareholder return (‘TSR’) and underlying earnings per
share (‘EPS’) are the right measures. However, we have decided
to tilt the balance away from an equal weighting and more
towards underlying EPS, which will account for two-thirds of
the award and relative TSR for one-third. This is intended to
signal the importance of increasing Ricardo’s profitability as
measured by underlying EPS and to give the management
team a stronger incentive to drive profitable performance
which should in turn lead to increased shareholder value. The
underlying EPS target range for the 2019 awards is described in
some detail and equates to a compound annual growth rate of
3.9% to 8.8% over the next three years.
The 2019 share awards will be as per the table on the
following page:
Directors’ remuneration report
Long-term incentive awards to be granted in October 2019
Role
Chief Executive Officer ('CEO')
Chief Finance Officer ('CFO')
Chief Operating Officer ('COO')
LTIP shares
Bonus-linked shares
Total award
% of salary
100
55
55
15.70
12.75
10.75
115.70
67.75
65.75
Looking ahead to FY 2019/20
The Committee has been assessing and acting on our
responsibilities and duties under the 2018 Corporate
Governance Code which applies to Ricardo with effect from
1 July 2019. We have also already started to review Ricardo’s
Directors’ Remuneration Policy. We operate in an international
labour market and we need to be able to recruit and retain
very talented people with deep technical skills and expertise
in an uncertain world: this is essential to Ricardo’s ability to
create value. We shall be seeking the views of our largest
shareholders – and also those who voted against the Directors’
Remuneration Report last year – during the course of the next
few months. I shall be leaving the Board at the Annual General
Meeting in November after nine years and handing over to my
successor, Russell King, whose appointment was announced
on 6 September 2019. If you have any questions or comments
on the Directors’ Remuneration Report please do contact
me through Patricia Ryan, Ricardo’s Group Legal Counsel and
Company Secretary, at patricia.ryan@ricardo.com.
Peter Gilchrist CB
Chairman of the Remuneration Committee
SUMMARY OF THE KEY ELEMENTS OF EXECUTIVE DIRECTORS’ PAY IN FY 2018/19
Base salary
(effective 01/01/2019)
Other benefits
Pension
Annual bonus with deferral
of half of any bonus earned
Long-term incentive shares
(A) Bonus-linked shares(2)
(B) Long-term incentive plan(3)
Total maximum annual
award of shares
(A + B)
Share ownership and
retention policy
Dave Shemmans
(CEO)
£515,033
Ian Gibson
(CFO)
£334,772
Mark Garrett
(COO)
£287,950
• Company car allowance: £17,500;
• Private fuel;
• Private medical insurance; and
• Life assurance.
• Company car allowance: £12,000;
• Private fuel;
• Private medical insurance; and
• Life assurance.
• Company car allowance: £12,000;
• Private fuel;
• Private medical insurance; and
• Life assurance.
21.2%(1) of salary
(over Lower Earnings Limit)
• Maximum opportunity of 125%
20%(1) of salary
(over Lower Earnings Limit)
• Maximum opportunity of 100%
20%(1) of salary
(over Lower Earnings Limit)
• Maximum opportunity of 100%
of salary;
of salary;
of salary;
• Based on underlying PBT (60%),
• Based on underlying PBT (60%),
• Based on underlying PBT (60%),
net debt (15%) and
personal targets (25%); and
net debt (20%) and
personal targets (20%); and
net debt (20%) and
personal targets (20%); and
• 50% of any bonus to be deferred
• 50% of any bonus to be deferred
• 50% of any bonus to be deferred
into shares for three years.
into shares for three years.
into shares for three years.
62.5% of salary
100% of salary
50% of salary
55% of salary
50% of salary
55% of salary
162.5% of salary
105% of salary
105% of salary
• A minimum of 100% of base
• A minimum of 100% of base
• A minimum of 100% of base
salary;
salary;
salary;
• Net value of all vested shares to
• Net value of all vested shares to
• Net value of all vested shares to
be retained until holding met; and
• Year-end holding is 149% of base
be retained until holding met; and
• Year-end holding is 96% of base
be retained until holding met; and
• Year-end holding is 158% of base
salary.
salary.
salary.
(1) This reflects legacy pension arrangements. Arrangements for any new executive directors will be determined as part of the review of our policy in FY 2019/20.
(2) Maximum award on grant of bonus-linked shares:
a. An award of shares with a value on grant of half the gross equivalent of any annual bonus declared;
b. Vests approximately four years from the start of the bonus performance period if executive still in service and additional performance criteria are met over a three-year
period: based on a mix of underlying EPS growth and TSR vs. FTSE Small Cap Index (excluding financial services companies and investment trusts); and
c. Net value of all vested shares to be retained until share ownership requirement met; and
d. The value of the bonus-linked shares granted in 2018 was 27%, 23% and 16% of salary for the CEO, CFO and COO respectively.
(3) Face value of award of long-term incentive plan shares in October 2018:
a. Subject to three-year performance conditions: 50% underlying EPS growth, 50% TSR vs. FTSE Small Cap Index (excluding financial services companies and investment trusts); and
b. Net value of all vested shares to be retained until share ownership requirement met.
Creating a world fit for the future 89
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Directors’ remuneration report
PART 2 – ANNUAL REPORT ON REMUNERATION
This section of the report explains how Ricardo’s Directors’
Remuneration Policy, which was last approved in 2017, has been
implemented during the financial year ended 30 June 2019. The
paragraphs in this Annual Report on Remuneration that have
been audited are indicated.
The Remuneration Committee
During the year under review, the Committee was chaired by
Peter Gilchrist. The Committee also comprised Sir Terry Morgan,
Laurie Bowen, Malin Persson and Bill Spencer.
The Non-Executive Directors serving on the Committee have
no personal financial interest (other than as shareholders) in
matters to be decided, no potential conflicts of interest arising
from cross-directorships and no day-to-day involvement in
running the business. Biographical details of the members of the
Committee are shown on pages 76 and 77; details of attendance
at the meetings of the Committee during the year ended 30
June 2019 are shown on page 79.
Advisors to the Remuneration Committee
The Committee is supported by the Group HR Director
(Timothy Hargreaves), the Group Head of Remuneration and
Pensions (Mark Jarvis) and the Company Secretary (Patricia
Ryan). The Chief Executive Officer (Dave Shemmans) attends the
Committee’s meetings by invitation and is consulted in respect
of certain proposals. The Chief Financial Officer (Ian Gibson)
may be invited to attend meetings to address specific matters.
Neither the Chief Executive Officer nor the Chief Financial Officer
is consulted or involved in any discussions in respect of their own
remuneration.
During the year, FIT Remuneration Consultants and Shepherd
and Wedderburn (who have been jointly appointed by the
Committee following a competitive tender process) provided
independent advice on matters under consideration by the
Committee and updates on legislative requirements and
market practice.
FIT Remuneration Consultants’ fees for this work amounted
to £33,239 (calculated based on a mixture of fixed fees and
time spent). Shepherd and Wedderburn’s fees for advising the
Committee amounted to £33,000 (also calculated based on a
mixture of fixed fees and time spent). Shepherd and Wedderburn
also advises Ricardo on the design, implementation and operation
of its various share incentive plans.
FIT Remuneration Consultants are members of the
Remuneration Consultants Group and their work is governed by
its Code of Conduct. Shepherd and Wedderburn is a law firm and
is regulated accordingly. Having carefully considered all relevant
factors and using its judgement, the Committee is satisfied that
the advice provided on executive remuneration is objective and
independent and that no conflict of interest arises.
Voting outcome at AGM
The AGM for the financial year ended 30 June 2018 was held on
15 November 2018. The result of the vote on the remuneration
report is set out below. The remuneration policy in operation
during the year was approved by shareholders at the 2017 AGM;
details of this approval are also set out in the table below.
Votes(1)
For, including discretion
Against
Total votes cast
Withheld(1)
Annual Report on Remuneration
approved at 2018 AGM
Directors' Remuneration Policy
approved at 2017 AGM
%
88.0
12.0
100.0
Number
29,318,064
3,995,612
33,313,676
3,693,512
%
94.0
6.0
100.0
Number
35,127,967
2,224,774
37,352,741
1,851,358
(1) Excludes withheld votes. A vote withheld is not a vote in law and so is not counted for the purposes of the calculation of the proportion of votes ‘for’ and ‘against’ a resolution.
Performance at a glance in FY 2018/19 compared with FY 2017/18
Bonus performance outcomes
Long-term incentive performance outcomes in respect of awards vested in 2018
Underlying PBT
(adjusted)
£36.7m
(FY 2018/19)
£38.8m
(FY 2017/18)
Net debt
(adjusted)
£(26.2)m
(FY 2018/19)
£(19.1)m
(FY 2017/18)
3-year underlying EPS growth
RPI +8.3% p.a.
(overall 26.9% to 30 June 2018)
RPI +11.0% p.a.
(overall 42.9% to 30 June 2017)
3-year TSR growth
(2.8)%
(below median to October 2018)
31.4%
(between median and upper quartile to October 2017)
The closing mid-market price of the Company’s shares on 30 June 2019 was 760.0p per share (2018: 960.0p). The highest closing price
during the year was 980.0p per share and the lowest closing price during the year was 572.0p per share.
90 Ricardo plc Annual Report & Accounts 2018/19
Directors’ remuneration report
Pay at a glance in FY 2018/19
FY
2018/19
2017/18
2018/19
2017/18
2018/19
2017/18
637
615
162
199
998
266
404
126
1,411
409
394
352
340
86
78
573
146
153
48
741
62
68
482
90
133
41
604
s
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200
400
600
Single total figure (£'000)
800
1,000
1,200
1,400
1,600
Fixed remuneration (salary, benefits and pension)
Bonus
Face value at grant of vested long-term incentives(1)
Share price growth above face value of vested long-term incentives
(1) As the share price decreased over the life of the long-term incentive awards that vested in FY 2018/19, the face value at grant of these awards has been adjusted accordingly and no share price
2,500
appreciation is shown.
2,000
Single total figure table (audited)
The table below sets out the remuneration received by the Executive Directors and Non-Executive Directors during the year. This
should be considered in conjunction with the TSR performance graph on page 92.
2,126
40%
1,500
1,000
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1,173
15%
Financial
year
30%
Fixed remuneration
Short-term variable
remuneration
Base
salary
and fees Benefits(1)
£’000
£’000
30%
Bonus
(cash
element)(2)
£’000
Bonus
(deferred
1,103
element)
32%
£’000
Pension
£'000
Total
£’000
Long-term variable remuneration
– 3-year performance periods
Bonus-
linked
shares(3)
£’000
LTIPs(4)
£’000
Total
947
£’000
32%
Ian
100%
Gibson (CFO)
EXECUTIVE DIRECTORS
646
Dave
500
Shemmans (CEO)
2018/19
2017/18
2018/19
55%
2017/18
2018/19
Mark
-
Garrett (COO)
On-target
Minimum
2017/18
Dave Shemmans (CEO)
NON-EXECUTIVE DIRECTORS
2018/19
Sir Terry
Morgan CBE
2017/18
2018/19
2017/18
2018/19
2017/18
2018/19
2017/18
2018/19
2017/18
2018/19
2017/18
2018/19
2017/18
Laurie
Bowen(5)
500
Malin
Persson
Peter
600
Gilchrist CB
Bill
400
Spencer
Ian
Lee(6)
300
Total
)
0
0
1
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30%
508
490
328
316
284
Maximum
276
Fixed elements
152
147
65
62
49
47
49
47
57
51
-
19
1,492
1,455
23
22
17
16
12
10
1
-
1
2
57
47
8
6
1
1
-
3
120
107
417
100%
Minimum
106
103
64
62
56
54
670
10%
28%
81
133
43
73
31
45
Ian Gibson (CFO)
On-target
62%
81
30%
133
43
38%
73
31
Maximum
45
356
162
266
86
146
62
Minimum
90
100%
54
103
27
50
23
42
574
10%
28%
62%
On-target
145
427
51
151
45
132
Mark Garrett (COO)
30%
199
530
78
201
68
Maximum
174
38%
Short-term variable element
-
-
-
-
-
-
-
-
-
-
-
-
226
219
-
-
-
-
-
-
-
-
-
-
-
-
155
251
Long-term variable element
-
-
-
-
-
-
-
-
-
-
-
-
310
502
-
-
-
-
-
-
-
-
-
-
-
-
155
251
-
-
-
-
-
-
-
-
-
-
-
-
104
195
-
-
-
-
-
-
-
-
-
-
-
-
241
710
-
-
-
-
-
-
-
-
-
-
-
-
345
905
Total
£’000
998
1,411
573
741
482
604
153
147
66
64
106
94
57
53
58
52
-
22
2,493
3,188
200
(1) Further information on benefits for the Executive Directors can be found on page 93. The benefits for Non-Executive Directors represent reimbursement of expenses incurred
(including any associated personal tax charges) while travelling for business and Committee meetings.
100
(2) Further details of the annual bonus can be found from page 93.
(3) Further details of the bonus-linked share award vestings in the year can be found on page 99.
2011
(4) Further details of the LTIP award vestings in the year can be found on page 98.
(5) Laurie Bowen’s benefits largely consist of travel expenditure to and from the United States.
(6) Ian Lee retired as a Non-Executive Director on 8 November 2017.
2012
2010
2009
2013
2014
At 30 June each year
Ricardo TSR
FTSE Small Cap (Excl. Investment Trusts) TSR
FTSE All Share Support Services TSR
2015
2016
2017
2018
2019
Following the year-end, the Committee considered whether there were any circumstances that could or should result in the recovery
or withholding of any sums pursuant to the Company’s clawback arrangements. The conclusion reached by the Committee was that it
was not aware of any such circumstances.
Source: Thomson Reuters Datastream
Creating a world fit for the future 91
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m
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i
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n
-
200
800
1,000
1,200
1,400
1,600
Fixed remuneration (salary, benefits and pension)
Bonus
Face value at grant of vested long-term incentives(1)
Share price growth above face value of vested long-term incentives
637
615
162
199
998
266
404
126
1,411
FY
2018/19
2017/18
2018/19
2017/18
2018/19
2017/18
s
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1,500
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78
573
146
153
48
741
62
68
482
90
133
41
604
400
600
Single total figure (£'000)
409
394
352
340
1,173
15%
30%
2,126
40%
30%
646
500
Directors’ remuneration report
100%
55%
30%
670
10%
28%
62%
417
100%
1,103
32%
30%
38%
356
100%
574
10%
28%
62%
947
32%
30%
38%
-
Minimum
On-target
Maximum
Minimum
On-target
Maximum
Minimum
On-target
Maximum
Dave Shemmans (CEO)
Ian Gibson (CFO)
Mark Garrett (COO)
Pay for performance – TSR performance graph and CEO pay history
TSR from the year ended 30 June 2009 to 30 June 2019
Fixed elements
Short-term variable element
Long-term variable element
)
£
(
)
’
R
S
T
’
(
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a
b
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r
(
600
500
400
300
200
100
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Ricardo TSR
FTSE Small Cap (Excl. Investment Trusts) TSR
FTSE All Share Support Services TSR
At 30 June each year
Source: Thomson Reuters Datastream
The chart above shows Ricardo’s TSR performance for the past ten years against the FTSE Small Cap index (excluding investment trusts).
In the Committee’s opinion, the FTSE Small Cap index (excluding investment trusts) represents an appropriate index against which
the Company should be compared when considering the Company’s size. The FTSE All Share Support Services index is also shown for
information. The remuneration of the CEO, Dave Shemmans, for the same period is shown in the table below.
Financial year
2018/19
2017/18
2016/17
2015/16
2014/15
2013/14
2012/13
2011/12
2010/11
2009/10
Single figure of CEO's
total remuneration
£’000
Annual variable element award rates
against maximum opportunity
%
Long-term incentive vesting rates
against maximum opportunity
%
998
1,411
1,612
2,291
1,367
760
1,546
979
1,116
708
25
43
-
63
59
38
75
58
97
19
40
74
100
100
67
N/A(1)
77
35
46
36
(1) The performance period for awards made in November 2011 ended in October 2014 and so its vesting rate is included in FY 2014/15. The vesting rate is not applicable for
FY 2013/14 because the performance period for awards made in October 2010 ended in June 2013 and so the applicable vesting rate is included in FY 2012/13.
CEO remuneration compared to employees
The table below compares the percentage change in the CEO’s remuneration and the percentage change in employees’ remuneration
between FY 2017/18 and FY 2018/19. The percentage change in the CEO’s taxable benefits between FY 2017/18 and FY 2018/19
represents a £385 increase as a result of changes in private fuel provision and the taxable value of private medical insurance. The
average bonus paid to all employees across the Group decreased year-on-year as did the CEO’s bonus. The change in the employees’
annual bonus represents the average percentage change in bonuses for employees across the Group as a whole, with individual
performance against target varying between divisions.
Base salary
Benefits
Annual bonus
(1) The year-on-year change for the CEO is explained above and is not the result of any enhancement of the CEO’s benefits.
92 Ricardo plc Annual Report & Accounts 2018/19
CEO
%
3
2(1)
(39)
All employees
%
3
-(1)
(31)
Relative importance of pay spend
The following table sets out the total amounts spent on
remuneration for all employees, the dividends declared and
other significant distributions to shareholders in FY 2017/18 and
FY 2018/19.
FY 2018/19
FY 2017/18
% change
Total remuneration
spend (£m)
Key management
remuneration as
a proportion of
total remuneration
spend(1) (%)
R&D expenditure(2)
(£m)
Distributions to
shareholders(3) (£m)
179.9
175.0
2.8
2.7
13.4
11.4
3.1
9.5
10.9
(0.4)
41.1
4.6
(1) The key management personnel are the Board of Directors, together with the
Managing Directors who have the authority and responsibility for planning,
directing and controlling the Group’s activities and resources within the market
sectors in which the Group operates. Further details on key management
remuneration can be found on page 140. This measure was chosen in order to give
greater context for the scale of key management remuneration within Ricardo.
(2) Further details on R&D expenditure can be found on pages 19 and 33. This measure
was chosen because of the importance to Ricardo’s business of developing its
R&D portfolio.
(3) The only distributions made by the Company over these years were in the form of
dividends.
Detailed breakdown of pay in FY 2018/19
Base salary
Base salaries were reviewed with effect from January 2019. As
described in the policy section on page 103, a number of factors
are taken into account when salaries are reviewed, principally:
market levels of total pay for comparable roles in companies of
a similar size, complexity and sector; the individual’s experience,
scope of responsibilities and performance; and the salary
increases for employees across the Group, which on average was
3%. The current salary levels from 1 January 2019 and the increase
for each Executive Director are shown in the table below:
Executive Director
Dave Shemmans (CEO)
Ian Gibson (CFO)
Mark Garrett (COO)
Salary from
1 January 2019 (£)
Salary increase (%)
515,033
334,772
287,950
3.0
4.0(1)
2.5
(1) Ian Gibson’s salary increase reflected his personal contribution and performance.
Other benefits (audited)
The Company provides other cash benefits and benefits in kind
to its Executive Directors. These include a company car or cash
alternative, private fuel, private medical insurance, life assurance
and permanent health or disability insurance. The car allowance
levels remain unchanged and set at £17,500 p.a. for Dave
Shemmans and at £12,000 p.a. for Ian Gibson and Mark Garrett.
Non-Executive Directors can recover travel and
accommodation expenses for carrying out their duties and
do not receive any other benefits. If tax is payable by a Non-
Executive Director on expenses received, these may be paid
gross of tax.
Directors’ remuneration report
Pension (audited)
(a) The defined benefit scheme is closed and there are no active
members. During the year ended 30 June 2019, the transfer
value in respect of the Chief Executive Officer has increased.
The transfer value at 30 June 2019 was £640,593, an increase
of £15,249 from the prior year. The CEO’s Normal Retirement
Date (‘NRD’) is 16 June 2031, at which point he will receive
his pension at the date of leaving the fund, increased for
the period in deferment until his NRD. If he decides to retire
early, he will receive an immediate pension calculated as for
retirement at NRD but reduced for early payment.
(b) With respect to defined contribution pension schemes:
Employer
contributions payable
in the year
£’000
Dave Shemmans (CEO)
Ian Gibson (CFO)
Mark Garrett (COO)
5
-
3
Cash
in lieu
£’000
101
64
53
Annual performance-related bonus (audited)
For the year ended 30 June 2019, the maximum annual
performance-related bonus opportunity was 125% of salary for
the Chief Executive Officer and 100% of the salary for the other
Executive Directors. To determine the amount of bonus payable
for the year, the Committee assessed the level of achievement
against the financial measures and targets set in respect of:
• Group underlying profit before tax (60% for each of the
Executive Directors);
• Group net debt at year-end (15% for the CEO and 20% for the
other Executive Directors); and
• The achievement of specified individual objectives (25% for
the CEO and 20% for the other Executive Directors).
The choice of these measures, and their respective weightings
for each individual, reflected the Committee’s belief that any
incentive compensation should be tied both to the overall
performance of the Group and to those areas of the business
that the relevant individual can directly influence.
The targets set by the Committee take into account several
factors such as the business plan, management’s expectations
and brokers’ forecasts.
A sliding scale of targets for each financial measure of the
Group was set at the start of the 2018/19 financial year:
Performance achieved
Element payable (%)
Threshold
On-target
Maximum
-
50
100
Between any two points
Straight-line basis
Creating a world fit for the future 93
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Directors’ remuneration report
Detailed breakdown of pay in FY 2018/19 (continued)
Annual performance-related bonus (audited) (continued)
The personal objectives of the Executive Directors were different for each individual and were ascribed different weightings. The
Committee, supported by the Chairman of the Board in the case of Dave Shemmans, and supported by Dave Shemmans in the
case of the other Executive Directors and members of the leadership team, sets the personal objectives at the start of the year. The
Committee usually identifies ‘strategic areas’ which each Executive Director is asked to focus on and seeks to ensure that all personal
objectives are specific, measurable and are indirect drivers of financial performance and value creation. They usually set five objectives
and weight them in accordance with their relative importance. At the end of the year, based on a formal and qualitative assessment of
performance against each objective (at half year and full year), the Committee decides how well each individual has performed overall.
The targets set by the Committee take into account a number of issues shown in the table below but also include an assessment
against other strategic and business critical issues which are planned, or occur during the year, but are not declared as they are
business sensitive.
Personal objectives
FY 2018/19
Examples of performance outcomes against
personal objectives
Overall
achievement (%)
Dave Shemmans
(CEO)
• The implementation of the sustainable growth
• Completion of the acquisition of Transport
strategy through acquisition and to reach a target of
30% recurring revenue;
Engineering Pty Ltd and the acquisition of PLC
Consulting Pty Ltd;
78
90
• Increased the recurring revenue base;
• Increased emphasis on strategic client engagement;
• Growth of Ricardo Defense business; integration of
Control Point Corporation and commencement of
the ABS programme;
• Good progress on the digital agenda and new
technology transition in the global Automotive
Technical Consulting business;
• Internal talent management and succession
planning programme;
• Improvement in diversity statistics; and
• Effective management of the uncertainty and
disruption with focus on new Brexit deadline.
• Successful transition of audit partners;
• Successful and robust audit completed swiftly;
• Comprehensive and simplified reporting to the
Board on all finance issues;
• Successful management of the acquisitions,
managing the due diligence process and integrating
finance functions;
• Managing progress reviews with divisions robustly;
and
• Improved management and development of the
finance team.
• Excellent progress in reducing overspends and poor
70
performing projects;
• Improved processes at commencement of projects;
• Skilled maximisation of the R&D portfolio and driving
pull through. Improved external awareness of the
strong technology portfolio;
• Strong lead in the digitalisation programme and
development of close working with Roke on cyber
issues; and
• Further work required on driving inter-divisional
synergies.
• Development of and focus on Ricardo’s strategic
relationships;
• Maintain turnaround delivery of the US business and
meeting targets for profit and order book levels;
• Ensure the financial, cultural and technical
development of the global Automotive Technical
Consulting business;
• Development and implementation of management
succession planning and increasing diversity; and
• Identify and manage opportunities and risks of Brexit.
Ian Gibson
(CFO)
Mark Garrett
(COO)
• Lead work with divisional finance management to
ensure profit and cash delivery and drive process
improvements to support forecasting;
• Deliver robust audit design so as to be target-driven
and compliant;
• Continue to improve the simplicity and
professionalism of management and corporate
reporting;
• In support of strong divisional business models, lead
regular reviews of pricing, fees and utilisation; and
• Progress the finance team development and
create career progression and ensure retention and
diversity.
• Improve operational efficiency;
• Lead technology commercialisation through R&D
activity and by raising the profile of technology
solutions;
• Manage the R&D portfolio in Ricardo Innovations and
maximise leverage; and
• Support skills development.
94 Ricardo plc Annual Report & Accounts 2018/19
Directors’ remuneration report
Detailed breakdown of pay in FY 2018/19 (continued)
Annual performance-related bonus (audited) (continued)
The following table sets out the financial targets and the performance outcomes in respect of the Executive Directors’ bonus scheme
for the 2018/19 financial year.
Measure
CEO
CFO
COO
Underlying profit before tax
Year-end net debt
Personal objectives
60
15
25
60
20
20
60
20
20
Weighting
(% of maximum
opportunity)
Performance
required (£m)
Threshold On-target Maximum CEO
Actual performance (£m)
(adjusted)(1)
CFO
COO
38.5
40.5
42.5
36.7
36.7
36.7
(29.2)
(23.2)
(25.2)
Achievement of specific targets
(26.2)
70%
Total pay-out (% of maximum opportunity) = (a)
Maximum opportunity (% of base salary) = (b)
Total pay-out (% of base salary) = (a) x (b)
(26.2)
78%
(26.2)
90%
Pay-out
(% of maximum
opportunity)
CEO
CFO
COO
-
5.6
19.5
25.1
125
31.4
-
7.5
18.0
25.5
100
25.5
-
7.5
14.0
21.5
100
21.5
The performance of the Group over the year included a 1% decrease in underlying profit before tax to £37.0m (2018: £37.5m) and a year-
end net debt of £(47.4)m (2018: £(26.1)m).
The Group underlying profit before tax of £37.0m was adjusted by £0.3m for acquisition-related expenditure. The adjusted profit
performance at £36.7m is below the lower threshold of £38.5m and therefore no bonus is payable in respect of Group underlying
profit before tax. The Group net debt of £(47.4)m was adjusted by £21.2m for unbudgeted Transport Engineering net consideration,
acquisition-related expenditure, and other exceptional items which were reviewed by the Audit Committee and our external auditors
to give an adjusted net debt balance of £(26.2)m. The Group net debt was achieved at a level of 37.5% of maximum. The Committee
reviewed the adjustments to both underlying profit before tax and net debt in light of its bonus principles, which take account of
materiality and the need for consistency. Finally, the Committee also considered whether the result of the assessment of the specific
bonus targets reflected the overall performance of the Group during the year and was satisfied that this was the case.
One half of any bonus paid to an Executive Director is subject to a policy of compulsory deferral into ordinary shares, via the deferred
share bonus plan (‘DBP’), the release of which is dependent on continued employment for a three-year period from the award date.
Long-term incentive awards vesting during the financial year (audited)
Awards under the LTIP made in October 2015 vested in October 2018 on the basis of underlying EPS and TSR performance over
performance periods, the last of which ended in October 2018. The performance conditions applicable to these awards are
summarised below:
Relative TSR portion (50%)
Relative TSR performance against the
FTSE Small Cap (excl. financial services
companies and investment trusts)
Below median
Median
Upper quartile (or above)
Underlying EPS growth portion (50%)
Vesting level (%)
Underlying EPS growth performance
Vesting level (%)
-
25
Less than RPI +3% p.a.
RPI +3% p.a.
100
RPI +10% p.a.
-
25
100
Between median and upper quartile
Straight-line basis
Between RPI +3% and RPI +10% p.a.
Straight-line basis
Over the three-year performance period, Ricardo was ranked below the median of the TSR comparator group, giving a vesting level
for this portion of zero. Ricardo’s TSR over the period was (2.8)% against a median of 14.0%. The underlying EPS figure for the year
resulted from growth of 26.9% in real terms, which represented compound growth of RPI +8.3% p.a. compared to the base year, with
the result that the underlying EPS target was achieved to a level of 80.49% of the shares under award and subject to the underlying EPS
performance condition. The overall vesting level for this award was 40.25%. The number and value of shares which vested in October
2018 in respect of awards granted to each of the Executive Directors in October 2015 are set out on page 98 of this report.
The Committee was satisfied that there had been a sustained improvement in the overall performance of the Group over the three
years in question.
Creating a world fit for the future 95
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Directors’ remuneration report
Detailed breakdown of pay in FY 2018/19 (continued)
The Chairman’s and the Non-Executive Directors’ fees
The Chairman’s and the Non-Executive Directors’ fees as of 1 January 2019 are as follows:
Chairman’s fee
Non-Executive Directors’ fees:
Basic fee
Additional fee for Audit and Remuneration Committee Chairs
Additional fee for the Senior Independent Director
£’000
155
49
9
8
The above table reflects a 3% increase in the Chairman’s fee and a 3% increase in the basic fee for Non-Executive Directors, Committee
Chair fee and Senior Independent Director fee, relative to the prior year.
Payments to past directors and in respect of loss of office (audited)
No payments have been made to past directors of the Company or in respect of loss of office in the financial year.
Long-term incentive awards granted during the financial year (audited)
Awards were made to the Executive Directors under the DBP (bonus-linked shares) and LTIP in October 2018. The awards granted to
each Executive were as follows:
Deferred Bonus Plan (‘DBP’)
Type awarded
Basis for award
Date of award
Number of shares
Share price(2) (£)
Face value of award (£)
Vesting level for achievement of threshold performance (%)
End of performance period
Chief Executive
Officer
David Shemmans
Chief Financial
Officer
Ian Gibson
Chief Operating
Officer
Mark Garrett
Performance shares (bonus-linked shares)(1)
1:1 match for corresponding Deferred Award
25 October 2018
9,686
7.56
73,226
25
35 days after release of preliminary results announcement for FY 2020/21
(expected to be October 2021)
17,568
7.56
132,814
25
5,922
7.56
44,770
25
(1) As the bonus-linked shares are granted in the form of performance share awards, no ‘exercise price’ is payable in order to receive any vested shares.
(2) Average of the share prices over the five days up to and including 24 October 2018.
Long-Term Incentive Plan ('LTIP')
Type awarded
Basis for award (% of base salary)
Date of award
Number of shares
Share price(2) (£)
Face value of award (£)
Vesting level for achievement of threshold performance (%)
End of performance period
Chief Executive
Officer
David Shemmans
Chief Financial
Officer
Ian Gibson
Chief Operating
Officer
Mark Garrett
100
66,141
7.56
500,026
25
Performance shares(1)
55
25 October 2018
23,418
7.56
177,040
25
55
20,437
7.56
154,504
25
35 days after release of preliminary results announcement for FY 2020/21
(expected to be October 2021)
(1) As the LTIP awards are granted in the form of performance share awards, no ‘exercise price’ is payable in order to receive any vested shares.
(2) Average of the share prices over the five days up to and including 24 October 2018.
96 Ricardo plc Annual Report & Accounts 2018/19
Directors’ remuneration report
Detailed breakdown of pay in FY 2018/19 (continued)
Long-term incentive awards granted during the financial year (audited) (continued)
The vesting of these awards will be based on Ricardo’s three-year relative TSR (50%) and underlying EPS growth (50%) performance
summarised in the table below. The relative TSR measure was chosen by the Committee to link the remuneration of Executive Directors
to the performance experienced by shareholders and further align their interests. The underlying EPS measure was chosen to reward
sustained profit growth and align with one of our key performance indicators. In addition, no part of an award will vest unless the
Committee is satisfied that the achievement against the TSR and underlying EPS performance conditions is a genuine reflection of the
underlying performance of the Group over the performance period.
Relative TSR portion (50%)
Relative TSR performance against the FTSE
Small Cap (excl. financial services companies
and investment trusts)
Below median
Median
Upper quartile (or above)
Underlying EPS growth portion (50%)
Vesting level (%)
Adjusted underlying EPS for the final year in
the performance period (FY 2020/21)
Vesting level (%)
-
Less than 60p
25
60p
100
Equal to or greater than 69p
-
25
100
Between median and upper quartile
Straight-line basis
Between 60p and 69p
Straight-line basis
Performance target setting and those applying to awards outstanding during FY 2018/19
As shown in previous Directors’ Remuneration Reports, the Committee has a track record of setting stretching underlying EPS targets
which are carefully calibrated to deliver maximum pay-outs only where Ricardo has outperformed the business plan and market
expectations. Full vesting of the shares linked to relative TSR performance only occurs where Ricardo’s performance is in the upper
quartile of the FTSE Small Cap Index (excluding financial services companies and investment trusts).
The performance targets applicable to outstanding LTIP and bonus-linked share awards are as follows: For awards in years ended
30 June 2016 and 2017, maximum vesting of the underlying EPS portion required growth of RPI +10% per annum. The underlying EPS
target to achieve threshold vesting for awards granted in the years ended 30 June 2016 and 2017 required performance in excess of RPI
+3% per annum. As explained in the Directors’ Remuneration Report in the Annual Report & Accounts 2017, for awards in the year ended
30 June 2018 the Committee decided to move away from expressing our targets as growth percentages in excess of RPI. The reason for
this change was to simplify and enhance the ‘line of sight’ for participants and also to recognise the international scope of Ricardo. The
underlying EPS target to achieve threshold vesting for awards granted in the year ended 30 June 2018 requires underlying EPS of at least
65 pence and maximum vesting requires underlying EPS of at least 75 pence.
The performance condition applicable to the TSR portion of awards has remained constant through this period and is the same as
set out above for awards granted in the year ended 30 June 2019. The number and value of shares which were awarded to each of the
Executive Directors in the year ended 30 June 2019 are set out in the table on page 96.
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Creating a world fit for the future 97
Directors’ remuneration report
Directors’ interests in shares provisionally awarded under the LTIP (audited)
The following chart sets out in graphical form how the LTIP operates:
Targets set for 3-year period
Grant of share awards
Shares released subject to performance criteria
Performance period
After tax shares continue to be held pursuant
to the share retention policy at least until
minimum shareholding is achieved
Year 1
Year 2
Year 3
Year 4 and ongoing
For details of the share retention policy, see page 100.
The Directors’ interests in shares provisionally awarded under the LTIP are as follows:
Dave
Shemmans
(CEO)
Ian
Gibson
(CFO)
Mark
Garrett
(COO)
3-year cycle
ending
2018
2019
2020
2021
2018
2019
2020
2021
2018
2019
2020
2021
Award
date(1)
Oct 15
Oct 16
Nov 17
Oct 18
Oct 15
Oct 16
Nov 17
Oct 18
Oct 15
Oct 16
Nov 17
Oct 18
Share price at
award date in
pence
At 1 July
2018
904.80
954.30
830.00
756.00
904.80
954.30
830.00
756.00
904.80
954.30
830.00
756.00
50,088
48,915
57,927
-
17,734
17,318
20,510
-
15,477
15,114
17,899
-
Number of provisional shares
Awarded(2)
Lapsed
-
-
-
66,141
-
-
-
23,418
-
-
-
20,437
(29,931)
-
-
-
(10,597)
-
-
-
(9,249)
-
-
-
Vested
(20,157)
-
-
-
(7,137)
-
-
-
(6,228)
-
-
-
At 30 June
2019(3) Vesting date
-
48,915
57,927
66,141
-
17,318
20,510
23,418
-
15,114
17,899
20,437
25/10/2018
25/10/2019
08/11/2020
25/10/2021
25/10/2018
25/10/2019
08/11/2020
25/10/2021
25/10/2018
25/10/2019
08/11/2020
25/10/2021
(1) Awards made under the rules of the Ricardo plc 2014 Long Term Incentive Plan: performance conditions as outlined on page 97.
(2) The face values at the date of grant of the awards made in October 2018 were £500,026 for Dave Shemmans; £177,040 for Ian Gibson; and £154,504 for Mark Garrett.
(3) The mid-market closing price of the Company’s shares on 30 June 2019 was 760.0p per share (2018: 960.0p).
The values of the October 2015 awards vesting were £145,130 for Dave Shemmans; £51,386 for Ian Gibson; and £44,842 for Mark Garrett.
The market price per share of the shares that vested on 25 October 2018 was 720.0p.
98 Ricardo plc Annual Report & Accounts 2018/19
Directors’ remuneration report
Directors’ interests in shares provisionally awarded under the DBP (audited)
The following chart sets out in graphical form how the DBP operates:
Targets set for 3-year performance period applicable to bonus-linked shares
Bonus paid 50% cash and 50% in deferred shares and bonus-linked shares granted
Bonus targets set for year
Performance period in respect of bonus-linked shares
Annual bonus
performance year
Deferred shares held
Deferred shares released and bonus-linked
shares released subject to performance criteria
After tax shares continue to
be held pursuant to the share
retention policy at least until
minimum shareholding is
achieved
Year 1
Year 2
Year 3
Year 4
Year 5 and ongoing
For details of the share retention policy, see page 100.
The Directors’ interests in shares provisionally awarded under the DBP are as follows:
Type of award
Award
date
Deferral/
performance
period
Share price at
award date in
pence
Number of provisional shares
At 1 July
2018 Awarded(1)
Dividend
shares(2)
Lapsed
Dave
Shemmans
(CEO)
Ian
Gibson
(CFO)
Mark
Garrett
(COO)
Oct 15
Deferred
Bonus-linked shares(4) Oct 15
Deferred
Oct 16
Bonus-linked shares(4) Oct 16
Oct 18
Deferred
Bonus-linked shares(4) Oct 18
Deferred
Oct 15
Bonus-linked shares(4) Oct 15
Oct 16
Deferred
Bonus-linked shares(4) Oct 16
Deferred
Oct 18
Bonus-linked shares(4) Oct 18
Deferred
Oct 15
Bonus-linked shares(4) Oct 15
Deferred
Oct 16
Bonus-linked shares(4) Oct 16
Deferred
Oct 18
Bonus-linked shares(4) Oct 18
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
904.80
904.80
954.30
954.30
756.00
756.00
904.80
904.80
954.30
954.30
756.00
756.00
904.80
904.80
954.30
954.30
756.00
756.00
19,685
18,509
20,163
19,336
-
-
10,027
9,431
10,014
9,604
-
-
8,452
7,949
8,595
8,244
-
-
-
-
-
-
17,568
17,568
-
-
-
-
9,686
9,686
-
-
-
-
5,922
5,922
-
-
599
-
522
-
-
-
297
-
288
-
-
-
255
-
175
-
-
(11,061)
-
-
-
-
-
(5,636)
-
-
-
-
-
(4,750)
-
-
-
-
Vested
(19,685)
(7,448)
-
-
-
-
(10,027)
(3,795)
-
-
-
-
(8,452)
(3,199)
-
-
-
-
At 30 June
2019(3)
-
-
20,762
19,336
18,090
17,568
-
-
10,311
9,604
9,974
9,686
-
-
8,850
8,244
6,097
5,922
(1) The face values at the date of grant of the awards made in October 2018 were £132,814 for Dave Shemmans; £73,226 for Ian Gibson; and £44,770 for Mark Garrett.
(2) Amounts allocated include shares equivalent to dividends on provisional deferred award shares and vested bonus-linked shares.
(3) The mid-market closing price of the Company’s shares on 30 June 2019 was 760.0p (2018: 960.0p).
(4) Bonus-linked shares awarded under the rules of the Ricardo plc 2011 Deferred Bonus Plan: performance conditions as outlined on page 97.
The values of the October 2015 Deferred awards vesting were £151,968 for Dave Shemmans; £77,408 for Ian Gibson; and £65,249 for
Mark Garrett. The market price per share of the shares that vested on 19 October 2018 was 772.0p.
The values of the October 2015 Bonus-linked shares vesting were £53,626 for Dave Shemmans; £27,324 for Ian Gibson; and £23,033 for
Mark Garrett. The market price per share of the shares that vested on 25 October 2018 was 720.0p.
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Creating a world fit for the future 99
Directors’ remuneration report
Directors’ shareholdings (audited)
The interests of Directors and their connected persons in ordinary shares as at 30 June 2019, including any shares provisionally awarded
under the LTIP and DBP are presented in the table below.
At 11 September 2019, the interests in shares of the Directors who were still in office were unchanged from those at 30 June 2019.
EXECUTIVE DIRECTORS
Dave Shemmans (CEO)
Ian Gibson (CFO)
Mark Garrett (COO)
NON-EXECUTIVE DIRECTORS
Sir Terry Morgan CBE
Peter Gilchrist CB
Laurie Bowen
Malin Persson
Bill Spencer
Shareholding as at 30 June 2019
Not subject to
performance conditions
Subject to performance
conditions
No. of shares
% of base salary(1)
Deferred awards(2)
Long-term incentives (Bonus-
linked shares and LTIP awards)(2)
101,085
42,363
59,723
15,000
4,970
6,000
1,500
8,000
149
96
158
N/A
N/A
N/A
N/A
N/A
38,852
20,285
14,947
-
-
-
-
-
209,887
80,536
67,616
-
-
-
-
-
(1) For Executive Directors only (i.e. those who are subject to the share retention policy). Percentages calculated by reference to the mid-market closing price of the Company’s
shares on 30 June 2019 which was 760.0p per shares (2018: 960.0p).
(2) Deferred awards and bonus-linked shares were granted pursuant to the rules of the Ricardo plc 2011 Deferred Bonus Plan and LTIP awards were granted pursuant to the rules of
the Ricardo plc 2014 Long-Term Incentive Plan.
Share retention policy
In order to foster greater alignment between our Executive
Directors and our shareholders, the Board operates a share
retention policy for the Executive Directors with the intention
that each Executive Director will own shares in the Company
with a value at least equal to one times annual base salary.
Unvested awards granted under the Company’s employee
share schemes do not count towards this target. As at 30 June
2019, Dave Shemmans and Mark Garrett met this shareholding
requirement. Ian Gibson has increased his shareholding since last
year to 96% of his salary, but this remains below the
required minimum. Ian must retain the net value of all vested
shares from the LTIP and DBP until the minimum shareholding
has been achieved.
Executive Directors and their Board positions
with other companies during FY 2018/19
Executive Directors may, with the prior consent of the Board,
hold a non-executive directorship with another company.
On 1 September 2014, the Company’s Chief Executive Officer
was appointed as a non-executive director of Sutton and East
Surrey Water plc. He is permitted to retain the associated fees
which, for the year from 1 July 2018 to 30 June 2019 (inclusive),
amounted to £35,250.
On 25 November 2016, the Company’s Chief Operating Officer
was appointed as the non-executive chairman of Secured By
Design Limited. He is permitted to retain the associated fees
which, for the year from 1 July 2018 to 30 June 2019 (inclusive),
amounted to £20,000.
Dilution limits
The number of shares that may be issued under all Ricardo
employee share plans in any ten-year rolling period will be
restricted to 10% of the issued ordinary share capital of the
Company and 5% of the issued ordinary share capital of the
Company for discretionary employee share plans.
At the end of the year under review, the Company’s overall
dilution was 4.53%, of which 4.09% related to discretionary
employee share plans. The Company operates an employee
benefit trust (‘EBT’) which has principally been used to facilitate
the operation of the LTIP and DBP arrangements. Any new
shares issued to the trust are, however, included in the dilution
limits noted above.
Implementation of Directors’ Remuneration
Policy in FY 2019/20
The Committee anticipates the implementation of the 2017
Directors’ Remuneration Policy in FY 2019/20 to be similar to
that of FY 2018/19, although we propose a small change to the
weighting of measures in respect of the LTIP and the bonus-
linked shares (see page 101).
The Committee will:
• Review base salary levels for the Executive Directors with
effect from 1 January 2020;
• Set and review the performance targets for the FY 2019/20
annual bonus and the LTIP awards to be made in 2019 to
ensure continued alignment to strategy;
• Make awards under the LTIP; and
• Make awards under the DBP, where necessary.
100 Ricardo plc Annual Report & Accounts 2018/19
Directors’ remuneration report
with Customers on 1 July 2018 and IFRS 16 Leases on 1 July 2019.
It will make any adjustments when assessing the performance
outcomes to outstanding long-term incentive awards to ensure
that performance measurements are carried out on a like-for-like
basis and are fair to both shareholders and plan participants.
Note that because of these accounting charges, the underlying
EPS target range for the 2019 LTIP awards is not comparable to
the underlying EPS range for the 2018 LTIP awards.
The targets applicable to the TSR portion of these awards will
be the same as those which applied to awards granted last year.
Threshold performance (for which 25% of this portion
will vest) is generally intended to align to the anticipated
performance of the relevant market and our competitors. If
the maximum performance is achieved, we would expect to
have significantly outperformed the relevant market and our
competitors.
The Committee believes that TSR and underlying EPS are
appropriate measures for the LTIP as they are strongly aligned
to shareholder value creation. In particular, the normalised
underlying EPS performance targets are considered by the
Committee to be suitably stretching and will reward the
leadership team only if they perform very well. When calibrating
performance targets, the Committee takes into account the
economic and market outlook, the business plan and investor
expectations at the time of each award.
Finally, during the year the Committee will also review the
operation of the 2017 Directors’ Remuneration Policy and
consider any changes that should be made when shareholder
approval is sought for the replacement policy at the 2020 AGM.
The Directors’ Remuneration Report, comprising the Chairman’s
Overview in Part 1, the Annual Report on Remuneration in
Part 2 and the Directors’ Remuneration Policy in Part 3 was
approved by the Board on 11 September 2019 and signed on its
behalf by:
Implementation of Directors’ Remuneration
Policy in FY 2019/20 (continued)
The Committee has so far considered the weighting of the
performance measures to apply to the awards to be made
under the Company’s long-term incentive arrangements in
FY 2019/20. To provide additional focus on Ricardo’s profitable
performance, the Committee has determined that instead of an
equal weighting:
• one-third of the relevant shares will be subject to the relative
TSR measure; and
• the remaining two-thirds of the relevant shares will be subject
to the underlying EPS measure.
The Committee has also considered the target range to apply
to the underlying EPS portion of these awards. In order to ensure
that the target range remains challenging in light of market
expectations of the Company’s underlying EPS performance
to the year ending 30 June 2022, the Committee has
determined that:
• No part of the underlying EPS portion of these awards will
vest if the Company’s underlying EPS for the final year in the
performance period is lower than 60.1p;
• 25% of this portion will vest where the final year underlying
EPS is 60.1p;
• 100% of this portion will vest where the final year underlying
EPS is greater than or equal to 69.1p; and
• Vesting will take place on a straight-line basis between 60.1p
and 69.1p.
The target range has been set on the basis of Ricardo’s business
plan, the long-term strategy and consensus forecasts. Note that
the adjusted underlying EPS result for the financial year ended
30 June 2019 was 53.6p and the implied growth rate is a
compound annual growth rate of 3.9% at threshold and 8.8% at
maximum.
Where the underlying EPS performance period ends before
30 June 2022 (the final year of the performance period), the
Committee retains the discretion to amend these targets and
the corresponding vesting levels accordingly.
The Committee considered, and will continue to consider,
the impact of the introduction of IFRS 15 Revenue from Contracts
Peter Gilchrist CB
Chairman of the Remuneration Committee
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Creating a world fit for the future 101
Directors’ remuneration report
PART 3 – DIRECTORS’ REMUNERATION POLICY
Introduction
This Directors’ Remuneration Policy provides an overview of the Company’s policy on Directors’ pay that is designed to align with
and support Ricardo’s strategic plan and operates over the three years from the AGM held on 8 November 2017 (the ‘2017 AGM’) until
the AGM to be held in 2020. This policy permits the execution of remuneration arrangements that were agreed when the previous
policy was in effect. There have been no changes of substance to the text of the policy that was approved at the 2017 AGM. A copy
of the originally approved text is in the Annual Report & Accounts 2017, which is available on our website at: www.ricardo.com. We have,
however, updated the ‘remuneration outcomes’ chart on page 107 and the page references, for ease of use.
In accordance with the requirements of the Companies Act 2006, the policy contained in this part was subject to a binding vote at
the 2017 AGM and took effect immediately upon receipt of such approval from shareholders.
The Remuneration Committee – what we do
The Committee’s primary purpose is to make recommendations to the Board on the Group’s framework or broad policy for executive remuneration.
The Board has also delegated responsibility to the Committee for determining the remuneration, benefits and contractual arrangements of the
Chairman and the Executive Directors. No individual is involved in deciding his or her remuneration.
The Committee has written terms of reference, which are available at www.ricardo.com, and its responsibilities include:
• Determining and agreeing with the Board the policy for executive remuneration and monitoring and considering the policy for, and structure
of, senior management remuneration taking into account that the ultimate decision-making responsibility for the remuneration of the senior
management team (other than the Executive Directors) lies with the Chief Executive Officer;
• Agreeing the terms and conditions of employment for Executive Directors, including their individual annual remuneration and pension
arrangements, and reviewing such provisions for senior management;
• Agreeing the measures and targets for any performance-related bonus and share schemes;
• Agreeing the remuneration of the Chairman of the Board;
• Ensuring that, on termination, contractual terms and payments made are fair, both to the Company and the individual, so that failure is not
rewarded and the duty to mitigate loss is recognised wherever possible; and
• Agreeing the terms of reference of any remuneration advisors it appoints.
Taking shareholders’ views into account
When considering Ricardo’s remuneration policy and its implementation,
the Committee is always keen to ensure that it takes into account the
views and opinions of all the relevant stakeholders in the business. In
particular, when preparing its policy for approval at the 2017 AGM, the
Committee undertook a programme of engagement with the Company’s
largest institutional investors and their representative bodies in order to
better understand their perspective on our previous pay practices and
the proposed policy for 2017-2020. Shareholders were given an early
opportunity to raise any questions and in finalising the proposals a number
of questions were raised and answered: for example, on the use of the same
performance measures in respect of the deferred bonus matching shares
and the change in nomenclature to the bonus-linked shares. Both are
designed to simplify Ricardo’s long-term incentive arrangements.
In the spirit of continuous improvement and in order to ensure that our
remuneration policy continues fully to support achievement of business
objectives and delivery of value to shareholders, the Committee will
continue to review our policy periodically in the context of the changing
business environment. Any material future changes to policy will be
discussed with shareholders in advance.
Consideration of employment conditions
elsewhere in the Company
While Ricardo does not consult directly with employees on the
subject of Directors’ remuneration, the remuneration packages for
each Executive Director and their fixed and variable elements are
reviewed annually. This process takes into account a number of
factors, including the following:
•
Individual and business performance;
• Pay arrangements for similar roles in other companies and
consultancy organisations of Ricardo’s size, complexity and
international reach;
• Risk management; and
• Pay and employment conditions of employees of the Group.
The Committee also looks at the differential between the CEO’s pay
and Ricardo’s average employee earnings over time.
Overview of Ricardo’s remuneration policy for 2017-2020
The objective of Ricardo’s executive remuneration policy is to support the business strategy and timescales of an international
consultancy business by not only rewarding the standard of performance and the outcomes that our shareholders require, but also
encouraging share ownership and fostering alignment of interest between the Executive Directors and shareholders. We do this by
setting base levels of salary that are competitive, compared with companies of similar size and complexity to Ricardo, and providing
other remuneration package elements, namely the short-term annual bonus plan and long-term incentive arrangement, that only
pay for performance. Taken together, our two variable pay platforms focus on growing the profitability of the business, its resilience,
the achievement of discrete non-financial targets and linking executive outcomes with the shareholder experience both by delivering
rewards in the form of Ricardo shares and also by using a relative total shareholder return performance measure over the longer term.
The remuneration policy that was approved by shareholders at the 2017 AGM is:
• Simple and straightforward;
• Well-understood, both internally and externally;
• Competitive but fair; and
• Aligned to performance.
102 Ricardo plc Annual Report & Accounts 2018/19
Directors’ remuneration report
THE STRUCTURE OF OUR DIRECTORS’ REMUNERATION PACKAGE – THE POLICY TABLE
Maximum
Operation
Framework for assessing performance
Pay element and
link to strategy
Base salary
To provide a core
level of remuneration
to enable the
Company to
attract and retain
skilled, high-calibre
executives to deliver
its strategy.
Base salary increases
will not ordinarily
be more than 10%
p.a. with exceptional
increases over the
normal maximum
limit capped at
25% p.a.
However, generally
speaking, increases
will be in line with
salary increases for
employees across
the Group.
Other benefits
To provide market-
competitive benefits.
The total value of
benefits will not
exceed 10% of
base salary p.a.,
save in the case of
relocation.
Pension
To offer market-
competitive
retirement benefits.
For the Chief
Executive Officer, the
pension contribution
is 21.2% of salary
over the Lower
Earnings Limit due
to legacy pension
arrangements.
For all other
Executive Directors,
the pension
contribution is 20%
of salary over the
Lower Earnings
Limit.
None
None
None
Salary levels are reviewed annually in January
each year.
Pay is set by considering market levels of total pay
for comparable roles in companies of similar size,
complexity and sector, as well as each individual
Director’s experience, scope of responsibilities and
performance and the salary increases for employees
across the Group.
Ricardo places a strong emphasis on internal
succession planning. This emphasis may mean that
talented individuals are promoted rapidly. In such
circumstances, the Committee’s policy is to set a
relatively low base salary initially and then increase this
to a market competitive level for the role over time.
This may mean relatively high annual salary increases
as the individual gains experience in the new role. We
will notify shareholders where this is the case.
The Company provides other cash benefits and
benefits in kind to Executive Directors in line with
market practice. These include a company car or cash
alternative, private fuel, private medical insurance,
life assurance and permanent health and disability
insurance. The benefits arrangements are reviewed on
an annual basis.
The Committee reserves the right to provide further
benefits where this is appropriate in the individual’s
particular circumstances (for example, costs associated
with relocation as a result of the Director’s role with
the Company).
Certain other employees are eligible for the same or
similar benefits described above depending on their
role, seniority and geographical location.
The Company operates a defined contribution
scheme, the Ricardo International Pension Scheme
(‘RIPS’). The policy for Executive Directors (save for
the CEO’s legacy pension arrangements described
opposite) continues to be a pension contribution of
20% of base salary only over the Lower Earnings Limit.
Contributions are made up to the adjusted annual
allowance limit and the rest is paid as cash in lieu
of pension.
Executive Directors may only choose to opt out of the
RIPS where they are close to or have exceeded the
pension lifetime allowance and have applied for fixed
protection from HMRC. Under such circumstances,
Executive Directors will receive a cash payment in lieu
of pension.
On death in service, all Executive Directors, subject to
the medical requirements of the insurance company,
are entitled to a lump sum of four times annual salary
at date of death.
Early retirement is available with the consent of the
Company and the pension scheme trustees if the
individual is over 55 or retiring due to ill health.
The same policy approach applies to all employees
although contribution levels vary by seniority.
Creating a world fit for the future 103
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Directors’ remuneration report
THE STRUCTURE OF OUR DIRECTORS’ REMUNERATION PACKAGE – THE POLICY TABLE (CONTINUED)
Pay element and
link to strategy
Pay for
performance:
Annual bonus
To reward the annual
delivery of financial
and operational
targets.
Maximum
Operation
Framework for assessing performance
The measures and targets applicable to the annual
bonus scheme (and the different weightings ascribed
to them) are set annually by the Committee in order
to ensure they are relevant to participants and take
account of the most up-to-date business plan and
strategy.
A significant majority (at least 50%) of the bonus
opportunity will normally be determined by reference
to performance against Group KPIs such as:
• Underlying profit before tax; and
• Year-end net debt.
Any remaining part of a Director’s bonus will
normally be based on the achievement of personal
objectives which relate to delivery of the business
strategy. Examples include the development and
efficient execution of the strategic plan, developing
the business in emerging markets, identifying
opportunities for inorganic growth and succession
planning.
A payment scale for different levels of achievement
against each performance target is specified by the
Committee at the outset of each year – this ranges
from zero for below-threshold performance up to
100% for full satisfaction of the relevant target.
Maximum
opportunity of 125%
of base salary for
the CEO and 100%
of salary for other
Executive Directors.
Bonuses are awarded by reference to
performance against specific targets measured
over a single financial year:
One half of any bonus paid to an Executive Director
will be paid out shortly after the assessment of the
performance targets has been completed. The
remainder of the bonus will be compulsorily deferred
into ordinary shares, the vesting of which is normally
subject to continued employment for a three-year
period from the award date. The cash element of the
bonus is not payable unless the individual remains in
employment at the payment date.
The principal purpose of this bonus deferral
mechanism is to:
• Provide for further alignment of executives’ and
shareholders’ interests;
• Provide an additional retention element; and
• Encourage Executive Directors to build up a
shareholding in accordance with our share
retention policy.
Dividends and dividend equivalents for each deferral
period may also be paid in respect of shares under
award to the extent that shares have vested in
participants.
Bonus arrangements exist for certain other employees
throughout the Group on terms that are applicable
to their role, seniority and geographical location,
although typically at lower levels of maximum
opportunity to reflect that a greater proportion of
Executive Directors’ remuneration is performance-
based.
Malus and clawback: Annual bonuses (including any
element deferred into shares) may be subject to malus
and clawback provisions if certain events occur in the
period of three years from the end of the financial
year to which they relate. These events include the
Committee becoming aware of:
• A material misstatement of the Company’s
financial results;
• An error in the calculation of performance
conditions; or
• An act committed by the relevant participant
that could have resulted in summary dismissal by
reason of gross misconduct or which has caused
significant reputational damage to the Group.
The mechanism through which malus and clawback
can be implemented enables the Committee to take
various actions including:
• Reducing outstanding incentive awards; and
• Requiring a cash payment to be made by
participants.
104 Ricardo plc Annual Report & Accounts 2018/19
Directors’ remuneration report
THE STRUCTURE OF OUR DIRECTORS’ REMUNERATION PACKAGE – THE POLICY TABLE (CONTINUED)
Pay element and
link to strategy
Pay for
performance:
Long-term
incentives
Bonus-linked shares
To link short-term
and long-term
performance.
Performance shares
under the Long-
Term Incentive Plan
(‘LTIP’) and Bonus-
linked shares
To focus motivation
on the long-term
performance of the
Group and reward
shareholder value
creation.
To encourage share
ownership and
alignment with
shareholders.
Maximum
Operation
Framework for assessing performance
In addition to the initial performance period to
determine whether bonus-linked share awards are
made, the vesting of all long-term incentives is subject
to both continued employment and the extent to
which performance conditions measured over a
further specified three-year period are met.
The measures and targets applicable to the long-
term incentive awards will consist of challenging
shareholder return, financial and strategic measures.
The particular measures and targets to apply (and
the different weightings ascribed to them) will be set
annually by the Committee in order to ensure they
are relevant to participants, challenging to achieve
and take account of the most up-to-date business
plan and strategy. The current weightings between
the two long-term incentive measures that we use are
equal; however our policy is simply for financial and
shareholder return targets to make up at least 50% of
awards.
25% of each element of an award will vest for
achieving the threshold performance target with
100% of the awards being earned for maximum
performance (with straight-line vesting between
these points).
Further details of the performance conditions
applicable to awards to be made in FY 2019/20 are set
out on pages 100 and 101.
Maximum
opportunity in
aggregate of 162.5%
of salary for the CEO
and 105% of salary
for other Executive
Directors.
Bonus-linked shares – performance measured
over an aggregate four-year period:
Assuming that a satisfactory level of performance is
achieved over the financial year in which the annual
bonus is assessed (the first year in the four-year
aggregate performance period) which results in a
bonus being paid, Executive Directors will be granted
a bonus-linked share award over further shares (up
to a maximum of 1 for 1) in relation to the deferred
element of the bonus. Consequently, in a year when
there is no annual bonus, no bonus-linked share
award will be made thus providing a well-understood
and automatic mechanism for reducing the overall
quantum of awards in the year where performance
targets have not been met in full.
Bonus-linked share awards will be granted pursuant to
the rules of the Ricardo plc 2011 Deferred Bonus Plan
(the ‘DBP’), for which shareholder approval was given
at the 2011 Annual General Meeting.
LTIP – performance measured over a three-year
period:
Performance share awards under the LTIP are made on
an annual basis to the Executive Directors and a small
group of other senior executives.
Dividends and equivalents:
Dividends and dividend equivalents for each
performance period may also be paid in respect of
shares under award to the extent that shares have
vested in participants.
Malus and clawback: Long-term incentive awards
may be subject to malus and clawback provisions if
certain events occur after their grant but before the
expiry of the period of two years from the end of the
relevant performance period. These events include
the Committee becoming aware of:
• A material misstatement of the Company’s
financial results;
• An error in the calculation of performance
conditions; or
• An act committed by the relevant participant
that could have resulted in summary dismissal by
reason of gross misconduct or which has caused
significant reputational damage to the Group.
The mechanism through which malus and clawback
can be implemented enables the Committee to take
various actions including:
• Reducing outstanding incentive awards; and
• Requiring a cash payment to be made by
participants.
Finally, where the vesting of a deferred bonus share
award is reduced, the vesting of any associated bonus-
linked share award will accordingly be reduced.
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Creating a world fit for the future 105
Directors’ remuneration report
THE STRUCTURE OF OUR DIRECTORS’ REMUNERATION PACKAGE – THE POLICY TABLE (CONTINUED)
Pay element and
link to strategy
Chairman and
other Non-
Executive
Directors
Helps recruit and
retain high-quality
experienced
individuals.
Reflects time
commitment and
role.
Maximum
Operation
Framework for assessing performance
Company’s Articles
of Association
place a limit on the
aggregate annual
level of Non-
Executive Directors’
and Chairman’s fees
(currently £500,000).
None
The fees for Non-Executive Directors are set in line
with prevailing market conditions and at a level that
will attract individuals with the necessary experience
and ability to make a significant contribution to the
Group’s affairs.
Non-Executive Directors receive an annual basic fee
plus an additional fee for acting as the Chairman of
the Audit or Remuneration Committee or the Senior
Independent Director. An additional fee may be
paid for membership of the Technical Exploitation
Board (‘TEB’). No Non-Executive Director is currently
a member of the TEB. The Chairman of the Board
receives an annual fee payable monthly with no
additional fees for chairing Board committees. They
also receive reimbursement for travel and incidental
costs (including any associated personal tax charges)
incurred in furtherance of Company business.
Notes to the policy table:
1. The changes to the 2014 Directors’ Remuneration Policy consisted of:
ceilings on the elements of our policy which were not capped,
namely base salary and benefits;
a.
b.
c.
simplifying our long-term incentive arrangements so that the so-
called deferred bonus matching shares became the bonus-linked
shares; and
aligning and extending the malus and clawback provisions which
already applied to certain of our share plans across the LTIP, the
annual cash bonus, deferred bonus shares and bonus-linked shares.
2. Where maximum amounts for elements of remuneration have been
set within the Policy, these will operate simply as caps and are not
indicative of any aspiration.
3. A description of how the Company intends to implement the Policy
set out in the tables on pages 103 to 106 during the financial year to
30 June 2020 is provided on pages 100 and 101.
5. Ricardo’s variable pay may have any performance conditions
applicable to the relevant element amended or substituted by
the Committee if an event occurs which causes the Committee to
determine that an amended or substituted performance condition
would be more appropriate and not materially less difficult to satisfy.
The Committee may make adjustments, where these are fair and
reasonable, to measures or targets to take account of, for example, the
implications of acquisitions and disposals.
6. Long-term incentive awards can be granted in a variety of forms
such as performance shares, nil-cost options or forfeitable shares
and the Committee reserves the right to grant long-term incentive
awards with the same economic effect but in any of these different
contractual forms (including in cash). Long-term incentive awards can
also be adjusted in the event of any variation of the Company’s share
capital or any demerger, delisting, special dividend or other event that
may affect the Company’s share price.
4. The Committee reserves the right to make any remuneration
7. Under the terms of long-term incentive award performance
conditions, where any company becomes unsuitable as a member of
the comparator group as a result of, for example, a change of control
or delisting, the Committee has the discretion to treat that company
in such manner as it deems appropriate (including replacing it with
another organisation).
8.
In the event of a change of control, long-term incentive awards will
normally vest at that time, taking into account the extent to which any
performance criteria have been met (over the shortened performance
periods) and the time elapsed since grant.
payments and payments for loss of office (including exercising
any discretions available to it in connection with such payments)
notwithstanding that they are not in line with the Policy (as set out on
pages 103 to 106) where the terms of the payment were agreed:
i. before 29 October 2014 (the date the Company’s first shareholder-
approved Directors’ Remuneration Policy came into effect);
ii. before the Policy came into effect, provided that the terms of
the payment were consistent with the shareholder-approved
Directors’ Remuneration Policy in force at the time they were
agreed; or
iii. at a time when the relevant individual was not a Director of the
Company and, in the opinion of the Committee, the payment was
not in consideration for the individual becoming a Director of the
Company. For these purposes payments include the Committee
satisfying awards of variable remuneration and, in relation to an
award over shares, the terms of the payment are ‘agreed’ at the
time the award is granted.
All-employee share plans
For its UK employees the Company operates from time to time tax-advantaged share plans. These are a Share Incentive Plan (‘SIP’) and Save As You
Earn share option (‘SAYE’) scheme and they are intended to encourage share ownership and wider interest in the performance of the Company’s
shares. Executive Directors are eligible to participate in these arrangements up to the applicable statutory limits. The SIP provides for partnership,
matching, free and dividend shares. Equivalent arrangements operate from time to time for non-UK employees.
106 Ricardo plc Annual Report & Accounts 2018/19
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Directors’ remuneration report
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Illustrative remuneration outcomes at different performance levels
Ricardo’s pay policy seeks to ensure the long-term interests of Executive Directors are aligned with those of shareholders. The
604
remuneration packages for each Executive Director and their fixed and variable elements are reviewed annually. The scenario chart
below presents remuneration outcomes for the current Policy under minimum, on-target and maximum scenarios.
1,000
1,400
1,200
400
800
600
200
340
133
90
41
-
Single total figure (£'000)
Fixed remuneration (salary, benefits and pension)
Bonus
Face value at grant of vested long-term incentives(1)
Share price growth above face value of vested long-term incentives
2,500
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28%
62%
417
100%
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947
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Minimum
On-target
Maximum
Minimum
On-target
Maximum
Minimum
On-target
Maximum
Dave Shemmans (CEO)
Ian Gibson (CFO)
Mark Garrett (COO)
Fixed elements
Short-term variable element
Long-term variable element
500
The target scenario broadly illustrates the remuneration level when budgeted performance is achieved. The disclosures in the chart
above reflect the 2018/19 financial year data on the basis of the assumptions set out below:
• Fixed elements comprise current base salary, pension and other benefits. For example, for the CEO, fixed elements comprise base
salary of £515,033, pension (pension contribution and cash in lieu) of 21.2% of base salary above the Lower Earnings Limit and
benefits equal to those received in the 2018/19 financial year;
400
• For minimum performance, Executive Directors receive only the fixed elements of pay;
• For target performance, an assumption of 55% of bonus pay-out and threshold vesting (25%) in respect of long-term incentives has
• For maximum performance, an assumption of maximum bonus pay-out and maximum vesting in respect of long-term incentives
has been applied; and
200
• No share price increase has been assumed and this means that the single total figure in any year may be higher than the maximum
shown above.
100
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Ricardo TSR
FTSE Small Cap (Excl. Investment Trusts) TSR
FTSE All Share Support Services TSR
At 30 June each year
Source: Thomson Reuters Datastream
Creating a world fit for the future 107
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Directors’ remuneration report
Recruitment remuneration policy
New Executive Directors will be appointed on remuneration packages
with the same structure and elements as described in the policy table
starting on page 103. Annual bonus and long-term incentive awards will
be within the limits described in the policy table.
For external appointments, although we have no plans to offer additional
benefits on recruitment (and indeed did not do so for our last Executive
Director appointment) the Committee reserves the right to offer such
benefits when it considers this to be in the best interests of the Company
and shareholders and in order to protect a new Director against additional
costs. The Committee may agree that the Company will meet certain
relocation expenses as appropriate.
The Company may make an award to compensate a new recruit for
the value of any remuneration relinquished when leaving a former
employer. Any such award would reflect the nature, timescales and
performance requirements attaching to that relinquished remuneration.
The Listing Rules exemption 9.4.2 may be used for the purpose of such
an award. Shareholders will be informed of any such payments as soon as
practicable following the appointment.
For an internal appointment, any variable pay element awarded in
respect of the prior role may be allowed to pay out according to its
terms, adjusted as relevant to take into account the appointment. In
addition, any other ongoing remuneration obligations existing prior to
appointment may continue, and will be disclosed to shareholders at the
earliest opportunity.
On the appointment of a new Chairman or Non-Executive Director,
fees will be set taking into account the experience and calibre of the
individual. Where specific cash or share arrangements are delivered to
Non-Executive Directors, these will not include share options or other
performance-related elements.
The Board’s policy on setting notice periods for Directors is that these
should not exceed one year. It recognises, however, that it may be
necessary in the case of new executive appointments to offer an initial
longer notice period, which would subsequently reduce to one year after
the expiry of that period. All future appointments to the Board will comply
with this requirement.
Termination remuneration policy
The contractual termination provision is payment in lieu of notice equal
to one year’s base salary or, if termination is part way through the notice
period, the amount of base salary relating to any unexpired notice to
the date of termination.(1) There is an obligation on Directors to mitigate
any loss which they may suffer if the Company terminates their service
contract. The Committee will take such mitigation obligation into
account when determining the amount and timing of any compensation
payable to any departing Director. No compensation is paid for summary
dismissal, save for any statutory entitlements.
The cash element of the bonus is not payable unless the individual
remains in employment at the payment date.
Share-based awards will lapse unless the individual concerned leaves
for one of a number of specified ‘good leaver’ reasons which are: death;
injury, illness or disability; redundancy; or retirement. The Committee
retains the discretion to prevent awards from lapsing depending on the
circumstances of the departure and the best interests of the Company.
Awards which do not lapse on cessation of employment may vest on their
originally anticipated vesting date (although the Committee retains the
discretion to allow vesting at cessation, depending on the circumstances
under the applicable rules). These awards will also usually be subject
to a time pro-rating reduction to reflect the unexpired portion of the
performance or deferral period concerned, although the Committee will
retain the discretion to disapply this pro-rating. Awards that are subject
to performance conditions will usually only vest to the extent that these
conditions are satisfied.
Executive Directors will also be entitled to a payment in respect of any
accrued but untaken holiday and statutory entitlements on termination.
In the event that any payment is made in relation to termination for an
Executive Director, this will be fully disclosed.
(1) For Ian Gibson the contractual termination provision is payment in lieu of notice equal to one
year’s base salary, car allowance and pension allowance, to the extent that these benefits are
paid in cash.
108 Ricardo plc Annual Report & Accounts 2018/19
Directors’ remuneration report
Executive Directors’ service contracts
The current Executive Directors’ service contracts contain the key terms shown in the table below:
Provision
Remuneration
Notice period
Termination payment
Restrictive covenants
Detailed terms
• Salary, pension and benefits;
• Company car or cash allowance;
• Private health insurance for Director and dependants;
• Life assurance and death in-service benefits;
• Permanent health and disability insurance;
• Director’s liability insurance;
• 30 days’ paid annual leave;
• Participation in annual bonus plan, subject to plan rules and at the discretion of the Committee; and
• Eligible to participate in share plans, subject to plan rules and at the discretion of the Committee.
• 6 months’ notice by the Director and 12 months’ notice by the Company.
• See separate disclosure on page 108.
• During employment and for 6 months after leaving.(1)
(1) Except for Ian Gibson who is restricted for 12 months after leaving.
The Executive Directors’ service contracts are available for inspection, on request, at the Company’s registered office.
Non-Executive Directors – fees and letters of appointment
The Committee determines the Chairman’s fees. The Chairman and the Executive Directors determine the fees to other Non-Executive
Directors. No Director is present for any discussion or decision about his or her own remuneration. The fees are reviewed each January.
The Non-Executive Directors do not participate in any of the Company’s share incentive schemes, pension schemes or bonus
arrangements, nor do they have service agreements. They are appointed for a period of three years by letter of appointment and are
entitled to one month’s notice of early termination for which no compensation is payable. The unexpired term of the Non-Executive
Directors’ appointments as at 30 June 2019 were:
Non-Executive Director
Sir Terry Morgan CBE
Peter Gilchrist CB
Laurie Bowen
Malin Persson
Bill Spencer
Unexpired term of appointment (months)
6
5
24
30
10
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Creating a world fit for the future 109
Patricia Ryan – Group General Counsel and Company Secretary
Directors’ report
The Directors present their report and the audited consolidated
financial statements of Ricardo plc for the year ended 30 June 2019.
Dividends
The Directors recommend the payment of a final ordinary share
dividend of 15.28 pence per ordinary share on 21 November
2019 to shareholders who are on the register of members at the
close of business on 8 November 2019, which together with the
interim dividend paid on 8 April 2019 makes a total of 21.28 pence
(FY 2017/18: 20.46 pence) per ordinary share for the year.
Acquisitions and disposals
The acquisition of Transport Engineering Pty Ltd completed on
31 May 2019 and was subsequently renamed Ricardo Rail Australia
Pty Ltd, a wholly-owned subsidiary of Ricardo Australia Pty Ltd.
Events after the reporting date
The acquisition of PLC Consulting Pty Ltd completed on
31 July 2019 and was subsequently renamed Ricardo Energy
Environment and Planning Pty Ltd, a wholly-owned subsidiary of
Ricardo Australia Pty Ltd.
Ricardo Real Estate LLC purchased the freehold title to
the campus occupied by its fellow subsidiary, Ricardo, Inc. in
Detroit, Michigan on 21 August 2019, on which Ricardo, Inc. was
previously committed as a leasehold tenant until October 2037.
Research and Development
The Group continues to devote effort and resources to the
research and development of new technologies. Costs of £13.4m
have been incurred, of which £7.6m has been capitalised and
£5.8m has been charged to the income statement during the year.
110 Ricardo plc Annual Report & Accounts 2018/19
Board of Directors
The Directors of the Company as at 30 June 2019 appear on
pages 76 and 77. All Directors held office through the financial
year under review. Directors appointed after 30 June 2019 but by
the date of this report appear on pages 80 and 81.
Directors’ interests in shares
Directors’ interests in shares and share options are contained on
pages 98 to 100 in the Directors’ Remuneration Report.
Directors’ indemnities
The Company has entered into deeds of indemnity in favour
of each of its Directors under which the Company agrees to
indemnify each Director against liabilities incurred by that
Director in respect of acts or omissions arising in the course of
their office or otherwise by virtue of their office.
Where such deeds are for the benefit of Directors, they
are qualifying third party indemnity provisions as defined by
section 309B of the Companies Act 1985 or section 234 of the
Companies Act 2006, as applicable. At the date of this report,
these indemnities are therefore in force for the benefit of all the
current Directors of the Company.
On 30 June 2014, Ricardo UK Limited and Ricardo-AEA
Limited, subsidiaries of the Group, entered into qualifying third-
party indemnity provisions as defined by section 234 of the
Companies Act 2006 in favour of their Directors, under which
each Director is indemnified against liabilities incurred by that
Director in respect of acts or omissions arising in the course
of their office or otherwise by virtue of their office and such
provisions remain in force as at the date of this report.
Employee information
The Company provides employees with various opportunities
to obtain information on matters of concern to them and to
improve awareness of the financial and economic factors that
affect the performance of the Company. These include bi-annual
presentations to all members of staff, department and team
briefings and meetings with employee representatives that take
place throughout the year.
All companies within the Group strive to operate fairly at all
times and this includes not permitting discrimination against
any employee or applicant for employment on the basis of
race, religion or belief, colour, gender, disability, national origin,
age, military service, veteran status, sexual orientation or marital
status. This includes giving full and fair consideration to suitable
applications for employment from disabled persons and making
appropriate accommodations so that if existing employees
become disabled they can continue to be employed, wherever
practicable, in the same job or, if this is not practicable, making
every effort to find suitable alternative employment and to
provide relevant training.
Change of control provisions
There are a number of agreements that take effect, alter or
terminate upon a change of control of the Company following
a takeover bid, such as commercial contracts, bank facility
agreements, property lease arrangements and employees’ share
plans. None of these are considered to be significant in terms of
their likely impact on the business of the Group as a whole.
Management report
The management report required by the provisions of the
Disclosure and Transparency Rules is included within the
Strategic Report and has been prepared in consultation with
management.
Share capital
As at 30 August 2019, the Company’s share capital is divided
solely into 53,406,250 ordinary shares of 25 pence each, all of
which are fully paid. The ordinary shares are listed on the London
Stock Exchange.
All ordinary shares rank equally for all dividends and
distributions that may be declared on such shares. At general
meetings of the Company, each member who is present (in
person, by proxy or by representative) is entitled to one vote on
a show of hands and, on a poll, to one vote per share.
With respect to shares held on behalf of participants in the
all-employee Share Incentive Plan, the trustees are required to
vote as the participants direct them to do so in respect of their
plan shares. There are no restrictions on voting rights and no
securities carry special voting rights with regard to the control of
the Company.
Awards granted under the Company’s share plans are satisfied
either by shares held in the employee benefit trust or by the
issue of new shares when awards vest. The Remuneration
Committee monitors the number of awards made under the
various share plans and their potential impact on the relevant
Directors’ report
dilution limits recommended by the Investment Association.
Based on the Company’s issued share capital as at 30 June
2019, the overall dilution was 4.53% (i.e. under the 10% limit for
all plans in any rolling 10-year period) and 4.09% for discretionary
employee share plans (i.e. under the 5% limit for discretionary
employee share plans in any rolling 10-year period).
The Company was given authority to purchase up to 15% of
its existing ordinary share capital at the 2018 AGM. That authority
will expire at the conclusion of the 2019 AGM unless renewed.
Accordingly, a special resolution to renew the authority will be
proposed at the forthcoming AGM.
The existing authority for Directors to allot ordinary shares
will expire at the conclusion of the 2019 AGM unless renewed.
Accordingly, an ordinary resolution to renew this authority will
be proposed at the forthcoming AGM. In addition, it will be
proposed to give the Directors further authority for a period
of one year to allot ordinary shares in connection with a rights
issue in favour of ordinary shareholders. This is in accordance
with guidance issued by the Association of British Insurers. If the
Directors were to use further authority in the year following the
2019 AGM, all Directors wishing to remain in office would stand
for re-election at the 2020 AGM.
Details of these resolutions are included with the Notice of
AGM enclosed with this report.
Resolutions at the Annual General Meeting
The Company’s AGM will be held on 14 November 2019.
Accompanying this report is the Notice of AGM which sets out
the resolutions to be considered and approved at the meeting,
together with some explanatory notes. The resolutions cover
such routine matters as the renewal of authority to allot shares,
to disapply pre-emption rights and to purchase own shares.
Substantial shareholdings
As at 30 August 2019, the Company has been notified of the
following material interests in the voting rights of the Company
under the provisions of the Disclosure and Transparency Rules.
Shareholders
Aberdeen Standard Investments
Aviva Investors
Canaccord Genuity Wealth Management
Invesco Asset Management
Royal London Asset Management
NN Investment Partners
Baillie Gifford
Impax Asset Management
Columbia Threadneedle Investments
M&G Investment Management
Number
of shares
4,309,020
3,786,864
3,711,500
2,898,759
2,584,978
2,136,794
2,107,564
2,051,194
1,947,162
1,623,493
% of issued
share
capital
8.07
7.09
6.95
5.43
4.84
4.00
3.95
3.84
3.65
3.04
Donations
During the year the Group made various charitable donations
which are summarised in the Corporate Responsibility and
Sustainability Report on page 43. The Group made no political
donations during the year ended 30 June 2019.
Creating a world fit for the future 111
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Directors’ report
Independent auditors
Following a tender process for external audit services and
shareholder approval at the 2018 AGM, KPMG LLP were
appointed as independent auditors of the Group and Company
for the year ended 30 June 2019.
• An indication of the likely future developments in the Group’s
business can found in the Strategic Report on pages 11, 15, 25
and 27;
• Information on greenhouse gas emissions can be found on
pages 40 to 42;
A resolution to re-appoint KPMG LLP as independent auditors
• The Group’s statement on corporate governance can be
of the Group and Company will be proposed at the 2019 AGM.
Going concern
Having assessed the principal risks and the other matters
discussed in connection with the Viability Statement on
page 47, the Directors considered it appropriate to adopt the
going concern basis of accounting in preparing the financial
statements.
Branches outside the UK
The Company has no overseas branches outside the UK.
A number of the Group’s subsidiaries have overseas branches
outside the UK, which are disclosed in their local statutory
financial statements, where required.
Additional information
Certain information that is required to be included in the
Directors’ Report can be found elsewhere in this document
as referred to below, each of which is incorporated into the
Directors’ Report by cross-reference:
found in the Corporate Governance Statement on pages 78 to
83; and
• The Group’s financial risk management objectives and policies
in relation to its use of financial instruments and its exposure
to capital, liquidity, credit and market risk, to the extent they
are material, are set out in Note 23 to the financial statements
on pages 154 to 158.
The Directors’ Report was approved by order of the Board on
11 September 2019 and signed on its behalf by:
Patricia Ryan
Group General Counsel and Company Secretary
112 Ricardo plc Annual Report & Accounts 2018/19
Statement of Directors’ responsibilities
in respect of the Annual Report and the financial statements
The Directors are responsible for preparing the Annual Report
and the Group and Parent Company financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and
Parent Company financial statements for each financial year.
Under that law they are required to prepare the Group financial
statements in accordance with International Financial Reporting
Standards (‘IFRS’) as adopted by the European Union (‘EU’) and
applicable law, and have elected to prepare the Parent Company
financial statements on the same basis.
Under company law the Directors must not approve the
financial statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Group and Parent
Company and of their profit or loss for that period. In preparing
each of the Group and Parent Company financial statements, the
Directors are required to:
• Select suitable accounting policies and then apply them
consistently;
• Make judgements and estimates that are reasonable, relevant
and reliable;
• State whether they have been prepared in accordance with
IFRS as adopted by the EU;
• Assess the Group and Parent Company’s ability to continue as
a going concern, disclosing, as applicable, matters related to
going concern; and
• Use the going concern basis of accounting unless they either
intend to liquidate the Group or the Parent Company or to
cease operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Parent
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Parent Company and
enable them to ensure that its financial statements comply with
the Companies Act 2006. They are responsible for such internal
control as they determine is necessary to enable the preparation
of financial statements that are free from material misstatement,
whether due to fraud or error, and have general responsibility for
taking such steps as are reasonably open to them to safeguard
the assets of the Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors’ Report,
Directors’ Remuneration Report and Corporate Governance
Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and
integrity of the corporate and financial information included
on the Company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Responsibility statement of the Directors in
respect of the Annual Report
We confirm that to the best of our knowledge:
• The financial statements, prepared in accordance with IFRS
as adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Parent
Company and the undertakings included in the consolidation
taken as a whole; and
• The Strategic Report includes a fair review of the development
and performance of the business and the position of the issuer
and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties that they face.
We consider the Annual Report and financial statements, taken
as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Group’s
position and performance, business model and strategy.
The Statement of Directors’ Responsibilities was approved by
the Board of Directors on 11 September 2019 and signed on its
behalf by:
Dave Shemmans
Chief Executive Officer
Ian Gibson
Chief Financial Officer
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Creating a world fit for the future 113
Financial
statements
114 Ricardo plc Annual Report & Accounts 2018/19
Air Quality and
Climate Change
Connectivity and
Intelligent Devices
Energy Security
and Sustainability
Global
Stability
Natural Resource
Scarcity
125
Independent auditors’ report
116
124 Consolidated income statement
124
Consolidated statement of
comprehensive income
Consolidated and parent company
statements of financial position
Consolidated and parent company
statements of changes in equity
Consolidated and parent company
statements of cash flow
128 Notes to the financial statements
127
126
Creating a world fit for the future 115
Rapid
Urbanisation
Independent auditors’ report
to the members of Ricardo plc
1. Our opinion is unmodified
We have audited the financial statements of Ricardo plc (‘the
Company’) for the year ended 30 June 2019 which comprise
the Consolidated income statement, Consolidated statement
of comprehensive income, Consolidated and Parent Company
statements of financial position, Consolidated and Parent
Company statements of changes in equity, Consolidated and
Parent Company statements of cash flow, and the related notes,
including the accounting policies in Note 1 to the financial
statements.
In our opinion:
• the financial statements give a true and fair view of the state of
the Group’s and of the Parent Company’s affairs as at 30 June
2019 and of the Group’s profit for the year then ended;
• the Group financial statements have been properly prepared
in accordance with International Financial Reporting Standards
as adopted by the European Union (‘IFRSs as adopted by
the EU’);
• the Parent Company financial statements have been properly
prepared in accordance with IFRSs as adopted by the EU and
as applied in accordance with the provisions of the Companies
Act 2006; and
• the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as
regards the Group financial statements, Article 4 of the IAS
Regulation.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our
responsibilities are described below. We believe that the audit
evidence we have obtained is a sufficient and appropriate basis
for our opinion. Our audit opinion is consistent with our report to
the Audit Committee.
We were first appointed as auditor by the shareholders on
15 November 2018. The financial period ended 30 June 2019 is
the first year of our engagement. We have fulfilled our ethical
responsibilities under, and we remain independent of the Group
in accordance with, UK ethical requirements including the FRC
Ethical Standard as applied to listed public interest entities. No
non-audit services prohibited by that standard were provided.
Overview
Materiality:
Group financial
statements as a whole
Coverage
Key audit matters
Recurring risks
£1.6m
4.8% of normalised profits and losses that make
up Group profit before tax
67% of normalised profits and losses that make
up Group profit before tax
The impact of uncertainties due to Britain exiting
the European Union on our audit
Revenue recognition on fixed price contracts in
Technical Consulting
Parent Company: Valuation of defined benefit
pension obligation
116 Ricardo plc Annual Report & Accounts 2018/19
Independent auditors’ report
2. Key audit matters: including our assessment of
risks of material misstatement
Key audit matters are those matters that, in our professional
judgment, were of most significance in the audit of the financial
statements and include the most significant assessed risks of
material misstatement (whether or not due to fraud) identified
by us, including those which had the greatest effect on: the
overall audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team. We summarise
herein the key audit matters in arriving at our audit opinion,
together with our key audit procedures to address those matters
and, as required for public interest entities, our results from those
procedures. These matters were addressed, and our results are
based on procedures undertaken, in the context of, and solely
for the purpose of, our audit of the financial statements as a
whole, and in forming our opinion thereon, and consequently
are incidental to that opinion, and we do not provide a separate
opinion on these matters.
The impact of uncertainties due
to Britain exiting the European
Union on our audit
Refer to page 86 (Audit Committee
Report).
The risk
Unprecedented levels of uncertainty
All audits assess and challenge the
reasonableness of estimates, in particular
as described in the valuation of the
defined benefit pension obligation
on page 119, and related disclosures
and the appropriateness of the going
concern basis of preparation of the
financial statements. All of these depend
on assessments of the future economic
environment and the Group’s future
prospects and performance.
In addition, we are required to consider
the other information presented in the
Annual Report including the Principal
Risks disclosure and the Viability
Statement and to consider the Directors’
statement that the Annual Report and
financial statements taken as a whole
is fair, balanced and understandable
and provides the information necessary
for shareholders to assess the Group’s
position and performance, business
model and strategy.
Brexit is one of the most significant
economic events for the UK and at the
date of this report its effects are subject
to unprecedented levels of uncertainty of
outcomes, with the full range of possible
effects unknown.
Our response
We developed a standardised firm-wide approach to the consideration
of the uncertainties arising from Brexit in planning and performing our
audits. Our procedures included:
• Our Brexit knowledge: We considered the Directors’ assessment of
Brexit-related sources of risk for the Group’s business and financial
resources compared with our own understanding of the risks. We
considered the Directors’ plans to take action to mitigate the risks.
• Sensitivity analysis: When addressing valuation of the defined
benefit pension obligation and other areas that depend on
forecasts, we compared the Directors’ analysis to our assessment
of the full range of reasonably possible scenarios resulting from
Brexit uncertainty and, where forecast cash flows are required to be
discounted, considered adjustments to discount rates for the level of
remaining uncertainty.
• Assessing transparency: As well as assessing individual disclosures
as part of our procedures on the valuation of the defined benefit
pension obligation, we considered all of the Brexit-related disclosures
together, including those in the Strategic Report, comparing the
overall picture against our understanding of the risks.
Our results
As reported under the valuation of the defined benefit pension obligation
on page 119, we found the resulting estimates and related disclosures, as
well as the disclosures in relation to going concern, to be acceptable.
However, no audit should be expected to predict the unknowable factors
or all possible future implications for a company and this is particularly the
case in relation to Brexit.
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Creating a world fit for the future 117
Independent auditors’ report
2. Key audit matters: including our assessment of risks of material misstatement (continued)
Revenue recognition on fixed
price contracts in the Technical
Consulting business
(£207.1m; 2018: £219.2m, restated for
the adoption of IFRS 15 Revenue from
Contracts with Customers).
Refer to page 86 (Audit Committee
Report), page 130 (Accounting Policy)
and page 138 (financial disclosures).
The risk
Subjective estimate:
For Technical Consulting, the Group
recognises the majority of revenue on
the stage of completion based on the
proportion of contract costs incurred
for the work performed to the balance
sheet date, relative to the estimated
total forecast costs of the contract at
completion.
The highest value, highest risk, most
technically complex and financially
challenging contracts to deliver are
categorised as ‘Red CAT 4’ contracts,
which are subject to more frequent and
senior levels of management review.
The key estimate impacting the
recognition of revenue is costs to
complete.
This is further complicated by contract
modifications which involve changes in
scope, and consequently the estimate
around costs to complete.
Our response
Our procedures included:
• Control reperformance: We tested key controls over recording work
done through timesheet approvals and invoicing through invoice
approval.
• Control observation: We attended the ‘Red CAT 4’ review meetings
in January and July 2019 at which performance of these contracts was
discussed with the Chief Financial Officer and divisional Managing
and Finance Directors.
• Test of detail: We selected a sample of costs incurred in the year and
agreed to supporting documentation.
• Historical comparisons: We assessed the reasonableness of the
Group’s forecasts by comparing with the comparative year forecasts
and the financial performance.
• Test of detail: We inspected a sample of correspondence with
customers and instances where contractual variations had arisen to
inform our assessment of the revenue and costs recorded up to the
balance sheet date. We also agreed the position to relevant invoicing
schedules and payment plans and the subsequent cash receipts
where possible.
• Independent reperformance: We recalculated the stage of
completion on the basis of actual costs and the Group’s latest forecast
to inform our assessment of the appropriate amount of revenue and
profit to recognise and compared this to the amounts recorded by
the Group.
• Assessing transparency: We considered the adequacy of the Group’s
disclosures about the degree of estimates involved in estimating
the stage of completion for determining the revenue amounts for
Technical Consulting contracts.
Our results
We found revenue recognition on fixed price contracts in Technical
Consulting to be acceptable.
118 Ricardo plc Annual Report & Accounts 2018/19
Independent auditors’ report
2. Key audit matters: including our assessment of risks of material misstatement (continued)
Parent Company: Valuation
of defined benefit pension
obligation
(£146.0m; 2018: £135.6m).
Refer to page 87 (Audit Committee
Report), page 130 (Accounting Policy)
and pages 158 to 160 (financial
disclosures).
Our response
Our procedures included:
• Benchmarking assumptions: We challenged key assumptions
applied (discount rate, inflation rate, and mortality rate) with the
support of our own actuarial specialists, including a comparison of key
assumptions against market data.
• Sensitivity analysis: We assessed the sensitivity of the defined
benefit obligation to changes in certain key assumptions.
• Assessing actuary’s credentials: We assessed the competence,
independence and integrity of the Company’s actuarial expert
through consideration of whether their work is subject to technical
performance standards and other professional or industry
requirements.
• Assessing transparency: We considered the adequacy of the
Company’s disclosures in respect of the sensitivity of the obligation to
changes in key assumptions.
Our results
We found the valuation of the defined benefit pension obligation to be
acceptable.
The risk
Subjective valuation:
The Company has a defined benefit
pension obligation that is material in the
context of the overall balance sheet and
the results of the Company.
Significant estimates, including the
discount rate, inflation rate and mortality
rate, are made in valuing the Company’s
defined benefit obligation (before
deducting the schemes’ assets). The
scheme is closed to future accrual, but
small changes in the assumptions and
estimates would have a significant effect
on the financial position of the Company.
The Company engages external actuarial
specialists to assist them in selecting
appropriate assumptions and calculating
the obligation.
The effect of these matters is that, as part
of our risk assessment, we determined
that the valuation of the defined benefit
obligation has a high degree of estimation
uncertainty, with a potential range of
reasonable outcomes greater than our
materiality for the financial statements
as a whole, and possibly many times that
amount. The financial statements (Note
24) disclose the sensitivity estimated by
the Company.
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Creating a world fit for the future 119
Independent auditors’ report
3. Our application of materiality and an
overview of the scope of our audit
Materiality for the Group financial statements as a whole
was set at £1.6m, determined with reference to a benchmark
of Group profit before tax, normalised to exclude this
year’s exceptional restructuring costs, acquisition-related
expenditure and GMP equalisation, as disclosed in Note 4, of
which it represents 4.8%.
Materiality for the Parent Company financial statements
as a whole was set at £1.5m, determined with reference to a
benchmark of Company net assets and chosen to be lower
than materiality for the Group financial statements as a whole.
It represents 1.5% of the stated benchmark.
We agreed to report to the Audit Committee any corrected
or uncorrected identified misstatements exceeding £80,000,
in addition to other identified misstatements that warranted
reporting on qualitative grounds.
Of the Group’s 48 reporting components, we subjected
7 to full scope audits for Group purposes and 4 to specified
risk-focused audit procedures.
The latter were not individually financially significant
enough to require a full scope audit for Group purposes, but
did present specific individual risks that needed to
be addressed.
The components within the scope of our work accounted
for the percentages illustrated opposite.
The remaining 18% of total Group revenue, 33% of
Group profit before tax and 18% of total Group assets is
represented by 37 reporting components, none of which
individually represented more than 5.5% of any of total Group
revenue, Group profit before tax or total Group assets. For
these residual components, we performed analysis at an
aggregated Group level to re-examine our assessment that
there were no significant risks of material misstatement
within these.
The Group team instructed component auditors as to the
significant areas to be covered, including the relevant risks
detailed herein and the information to be reported back. The
Group team approved the component materialities, which
ranged from £0.5m to £1.5m, having regard to the mix of
size and risk profile of the Group across the components.
The work on 3 of the 11 components was performed by
component auditors and the rest, including the audit of the
Parent Company, was performed by the Group team. The
Group team performed procedures on the items excluded
from normalised Group profit before tax.
The Group team visited all 3 component auditors (1 in
the Netherlands and 2 in the US) to assess the audit risk and
strategy. Telephone conference meetings were also held with
these component auditors. At these visits and meetings, the
findings reported to the Group team were discussed in more
detail, and any further work required by the Group team
was then performed by the component auditor.
120 Ricardo plc Annual Report & Accounts 2018/19
Normalised Group profit
before tax
£33.0m
Group materiality
£1.6m
£1.6m
Whole financial
statements materiality
£1.5m
Range of materiality at 11
components (£0.5m to £1.5m)
Normalised Group profit
before tax
Group materiality
£0.08m
Misstatements reported to the
audit committee
Group revenue
Group profit before tax
18
82%
64
67%
49
18
Group total assets
17 82%
65
Key:
Full scope for Group audit purposes 2019
Specified risk-focused audit procedures 2019
Residual components
4. We have nothing to report on going concern
The Directors have prepared the financial statements on the
going concern basis as they do not intend to liquidate the
Company or the Group or to cease their operations, and as
they have concluded that the Company’s and the Group’s
financial position means that this is realistic. They have also
concluded that there are no material uncertainties that could
have cast significant doubt over their ability to continue as a
going concern for at least a year from the date of approval of the
financial statements (‘the going concern period’).
Our responsibility is to conclude on the appropriateness of the
Directors’ conclusions and, had there been a material uncertainty
related to going concern, to make reference to that in this
audit report. However, as we cannot predict all future events or
conditions and as subsequent events may result in outcomes
that are inconsistent with judgements that were reasonable at
the time they were made, the absence of reference to a material
uncertainty in this auditor’s report is not a guarantee that the
Group and the Company will continue in operation.
In our evaluation of the Directors’ conclusions, we considered
the inherent risks to the Group’s and Company’s business model
and analysed how those risks might affect the Group’s and
Company’s financial resources or ability to continue operations
over the going concern period. The risk that we considered most
likely to adversely affect the Group’s and Company’s available
financial resources over this period was:
• Economic pressures in the marketplace.
As this was the risk that could potentially cast significant doubt
on the Group’s and the Company’s ability to continue as a going
concern, we considered sensitivities over the level of available
financial resources indicated by the Group’s financial forecasts
taking account of reasonably possible (but not unrealistic)
adverse effects that could arise from this risk and evaluated the
achievability of the actions the Directors consider they would
take to improve the position should the risks materialise. We also
considered less predictable but realistic second order impacts,
such as the impact of Brexit and the erosion of customer or
supplier confidence, which could result in a rapid reduction of
available financial resources.
Based on this work, we are required to report to you if:
• we have anything material to add or draw attention to
in relation to the Directors’ statement in Note 1 to the
financial statements on the use of the going concern basis
of accounting with no material uncertainties that may cast
significant doubt over the Group and Company’s use of that
basis for a period of at least twelve months from the date of
approval of the financial statements; or
• the related statement under the Listing Rules set out on page
113 is materially inconsistent with our audit knowledge.
We have nothing to report in these respects, and we did not
identify going concern as a key audit matter.
Independent auditors’ report
5. We have nothing to report on the other
information in the Annual Report
The Directors are responsible for the other information
presented in the Annual Report together with the financial
statements. Our opinion on the financial statements does not
cover the other information and, accordingly, we do not express
an audit opinion or, except as explicitly stated below, any form of
assurance conclusion thereon.
Our responsibility is to read the other information and, in
doing so, consider whether, based on our financial statements
audit work, the information therein is materially misstated
or inconsistent with the financial statements or our audit
knowledge. Based solely on that work we have not identified
material misstatements in the other information.
Strategic report and Directors’ report
Based solely on our work on the other information:
• we have not identified material misstatements in the Strategic
Report and the Directors’ Report;
• in our opinion the information given in those reports for the
financial year is consistent with the financial statements; and
• in our opinion those reports have been prepared in
accordance with the Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the Directors’ Remuneration Report to
be audited has been properly prepared in accordance with the
Companies Act 2006.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial
statements audit, we have nothing material to add or draw
attention to in relation to:
• the Directors’ confirmation within the Viability Statement on
page 47 that they have carried out a robust assessment of the
principal risks facing the Group, including those that would
threaten its business model, future performance, solvency and
liquidity;
• the Principal Risks and Uncertainties disclosures describing
these risks and explaining how they are being managed and
mitigated; and
• the Directors’ explanation in the Viability Statement of how
they have assessed the prospects of the Group, over what
period they have done so and why they considered that
period to be appropriate, and their statement as to whether
they have a reasonable expectation that the Group will be
able to continue in operation and meet its liabilities as they fall
due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications
or assumptions.
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7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 113,
the Directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and
fair view; such internal control as they determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error; assessing
the Group and Parent Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going
concern; and using the going concern basis of accounting unless
they either intend to liquidate the Group or the Parent Company
or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or other
irregularities (see page 123), or error, and to issue our opinion
in an auditor’s report. Reasonable assurance is a high level of
assurance, but does not guarantee that an audit conducted
in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from
fraud, other irregularities or error and are considered material if,
individually or in aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis
of the financial statements.
A fuller description of our responsibilities is provided on the
FRC’s website at www.frc.org.uk/auditorsresponsibilities.
Independent auditors’ report
5. We have nothing to report on the other
information in the Annual Report (continued)
Disclosures of principal risks and longer-term
viability (continued)
Under the Listing Rules we are required to review the Viability
Statement. We have nothing to report in this respect.
Our work is limited to assessing these matters in the context of
only the knowledge acquired during our financial statements
audit. As we cannot predict all future events or conditions and as
subsequent events may result in outcomes that are inconsistent
with judgments that were reasonable at the time they were
made, the absence of anything to report on these statements is
not a guarantee as to the Group’s and Company’s longer-term
viability.
Corporate governance disclosures
We are required to report to you if:
• we have identified material inconsistencies between the
knowledge we acquired during our financial statements
audit and the Directors’ statement that they consider that the
Annual Report and financial statements taken as a whole is fair,
balanced and understandable and provides the information
necessary for shareholders to assess the Group’s position and
performance, business model and strategy; or
• the section of the Annual Report describing the work of the
Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
We are required to report to you if the Corporate Governance
Statement does not properly disclose a departure from the
eleven provisions of the UK Corporate Governance Code
specified by the Listing Rules for our review.
We have nothing to report in these respects.
6. We have nothing to report on the other
matters on which we are required to report by
exception
Under the Companies Act 2006, we are required to report to you
if, in our opinion:
• adequate accounting records have not been kept by the
Parent Company, or returns adequate for our audit have not
been received from branches not visited by us; or
• the Parent Company financial statements and the part of
the Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
• certain disclosures of Directors’ remuneration specified by law
are not made; or
• we have not received all the information and explanations we
require for our audit.
We have nothing to report in these respects.
122 Ricardo plc Annual Report & Accounts 2018/19
7. Respective responsibilities (continued)
Irregularities – ability to detect
We identified areas of laws and regulations that could
reasonably be expected to have a material effect on the financial
statements from our general commercial and sector experience,
through discussion with the Directors and other management
(as required by auditing standards), and from inspection of the
Group’s regulatory and legal correspondence and discussed
with the Directors and other management the policies and
procedures regarding compliance with laws and regulations. We
communicated identified laws and regulations throughout our
team and remained alert to any indications of non-compliance
throughout the audit.
The potential effect of these laws and regulations on the
financial statements varies considerably.
Firstly, the Group is subject to laws and regulations that
directly affect the financial statements including financial
reporting legislation (including related companies legislation),
distributable profits legislation, and taxation legislation and
we assessed the extent of compliance with these laws and
regulations as part of our procedures on the related financial
statement items.
Secondly, the Group is subject to many other laws and
regulations where the consequences of non-compliance
could have a material effect on amounts or disclosures in the
financial statements, for instance through the imposition of
fines or litigation. We identified the following areas as those
most likely to have such an effect: anti-bribery, employment
law, regulatory capital and liquidity and certain aspects of
company legislation. Auditing standards limit the required audit
procedures to identify non-compliance with these laws and
regulations to enquiry of the Directors and other management
and inspection of regulatory and legal correspondence, if any.
These limited procedures did not identify actual or suspected
non-compliance.
Owing to the inherent limitations of an audit, there is an
unavoidable risk that we may not have detected some material
misstatements in the financial statements, even though we have
properly planned and performed our audit in accordance with
auditing standards. For example, the further removed non-
compliance with laws and regulations (irregularities) is from the
events and transactions reflected in the financial statements, the
less likely the inherently limited procedures required by auditing
standards would identify it. In addition, as with any audit, there
remained a higher risk of non-detection of irregularities, as
these may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal controls. We
are not responsible for preventing non-compliance and
cannot be expected to detect non-compliance with all laws
and regulations.
Independent auditors’ report
8. The purpose of our audit work and to whom
we owe our responsibilities
This report is made solely to the Company’s members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might
state to the Company’s members those matters we are required
to state to them in an auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company and
the Company’s members, as a body, for our audit work, for this
report, or for the opinions we have formed.
Michael Harper (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square, London, E14 5GL
11 September 2019
Creating a world fit for the future 123
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Consolidated income statement
for the year ended 30 June
Revenue
Cost of sales
Gross profit
Administrative expenses
Other income
Operating profit
Finance income
Finance costs
Net finance costs
Profit before taxation
Taxation
Profit for the year
Profit attributable to:
- Owners of the parent
- Non-controlling interests
Note
2 & 3
5
8
8
8
9
37
Underlying
£m
384.4
(249.5)
134.9
(96.3)
1.0
39.6
0.5
(3.1)
(2.6)
37.0
(8.2)
28.8
28.7
0.1
28.8
2019
Specific
adjusting
items(2)
£m
-
-
-
(10.5)
-
(10.5)
-
-
-
(10.5)
1.6
(8.9)
(8.9)
-
(8.9)
Earnings per ordinary share attributable to owners of the parent during the year
Basic
Diluted
10
10
2018
Restated(1)
Specific
adjusting
items(2)
£m
Underlying
£m
378.5
(235.8)
142.7
(103.7)
0.7
39.7
0.4
(2.6)
(2.2)
37.5
(8.0)
29.5
29.4
0.1
29.5
-
-
-
(10.5)
-
(10.5)
-
-
-
(10.5)
(1.3)
(11.8)
(11.8)
-
(11.8)
Total
£m
384.4
(249.5)
134.9
(106.8)
1.0
29.1
0.5
(3.1)
(2.6)
26.5
(6.6)
19.9
19.8
0.1
19.9
37.1p
36.9p
Total
£m
378.5
(235.8)
142.7
(114.2)
0.7
29.2
0.4
(2.6)
(2.2)
27.0
(9.3)
17.7
17.6
0.1
17.7
33.0p
32.8p
(1) Comparative information has been restated in accordance with IFRS 15 Revenue from Contracts with Customers as set out in Note 38(a). The Group has initially applied IFRS 15 and IFRS 9 Financial
Instruments as at 1 July 2018. Under the respective transition methods chosen, comparative information is restated for IFRS 15 as at 1 July 2017, but not for IFRS 9. Comparative information has also been
represented to reclassify certain indirect payroll expenses (£4.5m) and depreciation charges (£0.8m) from cost of sales to administrative expenses in a manner that is consistent with their classification in
the current year.
(2) Specific adjusting items comprise amortisation of acquired intangible assets, acquisition-related expenditure, reorganisation costs and non-recurring items that are disclosed separately due to the
significance of their nature or amount. Further details are given in Note 4.
Consolidated statement of comprehensive income
for the year ended 30 June
Profit for the year
Other comprehensive income
Items that will not be reclassified to profit or loss:
Remeasurements of the defined benefit pension scheme
Deferred tax on remeasurements of the defined benefit pension scheme
Total items that will not be reclassified to profit or loss
Items that may be subsequently reclassified to profit or loss:
Currency translation on foreign currency net investments
Fair value gains on foreign currency cash flow hedges
Total items that may be subsequently reclassified to profit or loss
Total other comprehensive (loss)/income for the year (net of tax)
Total comprehensive income for the year
Attributable to:
- Owners of the parent
- Non-controlling interests
Note
24
25
30
22
2019
£m
19.9
2018
Restated(1)
£m
17.7
(7.9)
1.4
(6.5)
1.2
0.1
1.3
(5.2)
14.7
14.6
0.1
14.7
13.8
(2.7)
11.1
0.1
-
0.1
11.2
28.9
28.8
0.1
28.9
(1) Comparative information has been restated in accordance with IFRS 15 Revenue from Contracts with Customers as set out in Note 38(a). The Group has initially applied IFRS 15 and IFRS 9 Financial
Instruments at 1 July 2018. Under the respective transition methods chosen, comparative information is restated for IFRS 15 as at 1 July 2017, but not for IFRS 9.
The Company has not presented its own Income Statement and Statement of Comprehensive Income as permitted by Section 408 of the Companies Act
2006. The Company’s profit for the year was £10.7m (2018: £0.2m).
124 Ricardo plc Annual Report & Accounts 2018/19
Consolidated and parent company statements of financial position
as at 30 June
Assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Investments
Deferred tax assets
Current assets
Inventories
Trade, contract and other receivables
Derivative financial assets
Current tax assets
Cash and cash equivalents
Non-current assets held for sale
Total assets
Liabilities
Current liabilities
Borrowings
Trade, contract and other payables
Current tax liabilities
Derivative financial liabilities
Provisions
Net current assets
Non-current liabilities
Borrowings
Trade, contract and other payables
Defined benefit obligation
Deferred tax liabilities
Provisions
Total liabilities
Net assets
Equity
Share capital
Share premium
Other reserves
Retained earnings
Equity attributable to owners of the parent
Non-controlling interests
Total equity
Note
13
14
15
16
25
17
18
22
33
19
21
20
22
26
21
20
24
25
26
27
28
30
31
37
2019
£m
84.2
41.0
44.6
-
6.7
176.5
14.5
141.4
0.3
-
36.3
192.5
2.9
195.4
371.9
(4.0)
(84.8)
(3.5)
(1.2)
(2.2)
(95.7)
99.7
(79.7)
(5.1)
(8.5)
(7.3)
(3.7)
(104.3)
(200.0)
171.9
13.4
14.3
16.9
126.8
171.4
0.5
171.9
Group
2018
Restated(1)
£m
65.5
31.7
45.3
-
8.9
151.4
13.3
135.3
0.1
1.3
33.1
183.1
-
183.1
334.5
(9.4)
(83.0)
(6.3)
(1.0)
(2.8)
(102.5)
80.6
(49.8)
-
(4.6)
(3.9)
(2.9)
(61.2)
(163.7)
170.8
13.4
14.3
15.7
127.0
170.4
0.4
170.8
Company
1 July 2017
Restated(1)
£m
62.0
32.4
48.0
-
15.3
157.7
13.9
133.1
0.9
0.6
27.9
176.4
2.8
179.2
336.9
(6.0)
(83.1)
(6.3)
(0.7)
(1.3)
(97.4)
81.8
(59.8)
-
(22.2)
(5.0)
(1.3)
(88.3)
(185.7)
151.2
13.3
14.3
15.6
107.7
150.9
0.3
151.2
2019
£m
-
0.9
4.5
103.1
2.1
110.6
-
91.8
0.3
-
1.7
93.8
-
93.8
204.4
(0.1)
(76.0)
(1.3)
(1.2)
-
(78.6)
15.2
(14.1)
-
(8.5)
(0.5)
(0.1)
(23.2)
(101.8)
102.6
13.4
14.3
-
74.9
102.6
-
102.6
2018
£m
-
1.6
4.5
103.1
1.7
110.9
-
89.6
0.1
0.2
0.3
90.2
-
90.2
201.1
(8.6)
(70.3)
-
(1.0)
-
(79.9)
10.3
(6.8)
-
(4.6)
(0.6)
-
(12.0)
(91.9)
109.2
13.4
14.3
-
81.5
109.2
-
109.2
(1) Comparative information has been restated in accordance with IFRS 15 Revenue from Contracts with Customers as set out in Note 38(a). The Group has initially applied IFRS 15 and IFRS 9 Financial
Instruments at 1 July 2018. Under the respective transition methods chosen, comparative information is restated for IFRS 15 as at 1 July 2017, but not for IFRS 9.
The notes on pages 128 to 173 form an integral part of these financial statements.
The financial statements of Ricardo plc (registered number 222915) on pages 124 to 173 were approved by the Board of Directors on 11 September 2019
and signed on its behalf by:
Dave Shemmans
Chief Executive Officer
Ian Gibson
Chief Financial Officer
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Profit for the year
Other comprehensive income
Items that will not be reclassified to profit or loss:
Remeasurements of the defined benefit pension scheme
Deferred tax on remeasurements of the defined benefit pension scheme
Total items that will not be reclassified to profit or loss
Items that may be subsequently reclassified to profit or loss:
Currency translation on foreign currency net investments
Fair value gains on foreign currency cash flow hedges
Total items that may be subsequently reclassified to profit or loss
Total other comprehensive (loss)/income for the year (net of tax)
Total comprehensive income for the year
Attributable to:
- Owners of the parent
- Non-controlling interests
Note
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25
30
22
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£m
19.9
(7.9)
1.4
(6.5)
1.2
0.1
1.3
(5.2)
14.7
14.6
0.1
14.7
2018
Restated(1)
£m
17.7
13.8
(2.7)
11.1
0.1
-
0.1
11.2
28.9
28.8
0.1
28.9
Consolidated and parent company statements of changes in equity
for the year ended 30 June
Attributable to owners of the parent
Group
At 30 June 2017 (previously reported)
Adjustment on retrospective application of
IFRS 15 (net of tax)(1)
At 1 July 2017 (restated)
Profit for the year (restated)(1)
Other comprehensive income for the year
Total comprehensive income for the year
Proceeds from shares issued
Equity-settled transactions
Tax credit relating to share option schemes
Ordinary share dividends
At 30 June 2018 (restated)
Adjustment on initial application of
IFRS 9 (net of tax)(1)
At 1 July 2018 (adjusted)
Profit for the year
Other comprehensive income/(loss) for the year
Total comprehensive income for the year
Equity-settled transactions
Purchases of own shares to settle awards
Ordinary share dividends
At 30 June 2019
Note
38(a)
38(a)
27
29
31
11
38(b)
29
31
11
Company
Note
At 1 July 2017
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
Proceeds from shares issued
Equity-settled transactions
Tax credit relating to share option schemes
Ordinary share dividends
At 30 June 2018
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Equity-settled transactions
Purchases of own shares to settle awards
Ordinary share dividends
At 30 June 2019
27
29
31
11
29
31
11
Share
capital
£m
Share
premium
£m
Other
reserves
£m
Retained
earnings
£m
13.3
-
13.3
-
-
-
0.1
-
-
-
13.4
-
13.4
-
-
-
-
-
-
13.4
14.3
-
14.3
-
-
-
-
-
-
-
14.3
-
14.3
-
-
-
-
-
-
14.3
15.6
-
15.6
-
0.1
0.1
-
-
-
-
15.7
-
15.7
-
1.2
1.2
-
-
-
16.9
112.2
(4.5)
107.7
17.6
11.1
28.7
-
1.0
0.1
(10.5)
127.0
(2.7)
124.3
19.8
(6.4)
13.4
1.0
(0.9)
(11.0)
126.8
Attributable to owners of the parent
Share
capital
£m
Share
premium
£m
Other
reserves
£m
Retained
earnings
£m
13.3
-
-
-
0.1
-
-
-
13.4
-
-
-
-
-
-
13.4
14.3
-
-
-
-
-
-
-
14.3
-
-
-
-
-
-
14.3
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
79.6
0.2
11.1
11.3
-
1.0
0.1
(10.5)
81.5
10.7
(6.4)
4.3
1.0
(0.9)
(11.0)
74.9
Non-
controlling
interests
£m
0.3
-
0.3
0.1
-
0.1
-
-
-
-
0.4
-
0.4
0.1
-
0.1
-
-
-
0.5
Non-
controlling
interests
£m
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
£m
155.4
(4.5)
150.9
17.6
11.2
28.8
0.1
1.0
0.1
(10.5)
170.4
(2.7)
167.7
19.8
(5.2)
14.6
1.0
(0.9)
(11.0)
171.4
Total
£m
107.2
0.2
11.1
11.3
0.1
1.0
0.1
(10.5)
109.2
10.7
(6.4)
4.3
1.0
(0.9)
(11.0)
102.6
Total
equity
£m
155.7
(4.5)
151.2
17.7
11.2
28.9
0.1
1.0
0.1
(10.5)
170.8
(2.7)
168.1
19.9
(5.2)
14.7
1.0
(0.9)
(11.0)
171.9
Total
equity
£m
107.2
0.2
11.1
11.3
0.1
1.0
0.1
(10.5)
109.2
10.7
(6.4)
4.3
1.0
(0.9)
(11.0)
102.6
(1) See Note 38(a) for details of the restatements arising from the retrospective application of IFRS 15 Revenue from Contracts with Customers and Note 38(b) for details of the adjustments arising from the
initial application of IFRS 9 Financial Instruments. The Group has applied IFRS 15 and IFRS 9 as at 1 July 2018. Under the respective transition methods chosen, comparative information is restated for
IFRS 15 as at 1 July 2017, but not for IFRS 9.
126 Ricardo plc Annual Report & Accounts 2018/19
Consolidated and parent company statements of cash flow
for the year ended 30 June
Group
Company
Cash flows from operating activities
Cash generated from/(used in) operations
Net finance (costs)/income
Tax (paid)/received
Net cash generated from operating activities
Cash flows from investing activities
Acquisitions of subsidiaries, net of cash acquired
Purchases of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Purchases of intangible assets and capitalised development costs
Dividends received from subsidiaries
Net cash (used in)/generated from investing activities
Cash flows from financing activities
Proceeds from issuance of ordinary shares
Purchases of own shares to settle awards
Proceeds from finance leases
Proceeds from borrowings
Repayments of borrowings
Dividends paid to shareholders
Net cash generated from/(used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
Net cash and cash equivalents at 1 July
Net cash and cash equivalents at 30 June
At 1 July
Cash and cash equivalents
Bank overdrafts
At 30 June
Cash and cash equivalents
Bank overdrafts
Net cash and cash equivalents at 30 June
Note
32
12
27
31
33
33
33
11
33
33
33
2019
£m
32.4
(2.3)
(4.9)
25.2
(18.9)
(7.6)
0.7
(9.1)
-
(34.9)
-
(0.9)
0.7
64.0
(34.8)
(11.0)
18.0
0.3
8.6
23.8
32.4
33.1
(9.3)
23.8
36.3
(3.9)
32.4
2018
£m
44.2
(2.1)
(7.7)
34.4
(4.6)
(7.7)
6.4
(6.5)
-
(12.4)
0.1
-
-
15.0
(25.0)
(10.5)
(20.4)
0.2
1.8
22.0
23.8
27.9
(5.9)
22.0
33.1
(9.3)
23.8
2019
£m
(0.5)
1.8
1.9
3.2
-
(0.2)
-
(0.3)
11.8
11.3
-
(0.9)
-
42.0
(34.8)
(11.0)
(4.7)
-
9.8
(8.2)
1.6
0.3
(8.5)
(8.2)
1.7
(0.1)
1.6
2018
£m
19.6
-
0.7
20.3
-
(0.1)
-
-
-
(0.1)
0.1
-
-
10.0
(23.0)
(10.5)
(23.4)
-
(3.2)
(5.0)
(8.2)
0.9
(5.9)
(5.0)
0.3
(8.5)
(8.2)
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Creating a world fit for the future 127
Notes to the financial statements
1 Accounting policies
Ricardo plc (the ‘Company’) and its subsidiaries (together, the ‘Group’)
provide engineering, technical, environmental and strategic consultancy
services, together with accreditation and independent assurance services.
The Group also manufactures and assembles high-quality prototypes and
niche volumes of complex engine, transmission and vehicle products,
together with the provision of advanced computer-aided engineering and
simulation software for conventional and electrified powertrains, as well
as complex physical systems. The Group sells its products and services to
customers in the UK, the rest of Europe, the Middle East, Asia and North
America.
Ricardo plc, a public company limited by shares, is listed on the London
Stock Exchange and incorporated and domiciled in the United Kingdom.
The address of its registered office is: Shoreham Technical Centre, Shoreham-
by-Sea, West Sussex, BN43 5FG, England, United Kingdom, and its registered
number is 222915.
The principal accounting policies applied in the preparation of these
financial statements are set out below. These policies have been consistently
applied to the years ended 30 June 2018 and 30 June 2019, except the
Group’s accounting policy for financial instruments as disclosed in Note 1(u).
Under the transition method chosen, comparative information has not been
restated for IFRS 9 Financial Instruments, which was adopted as at 1 July 2018.
Comparative information complies with the Group’s accounting policy for
financial instruments under IAS 39 Financial Instruments: Recognition and
Measurement, the changes from which are also disclosed in Note 1(u).
(a) Basis of preparation
These financial statements of Ricardo plc have been prepared in accordance
with International Financial Reporting Standards (‘IFRS’), IFRS Interpretations
Committee (‘IFRS IC’) interpretations adopted by the European Union (‘EU’)
and the Companies Act 2006 applicable to companies reporting under IFRS.
The financial statements have been prepared on a going concern basis
under the historical cost convention, as modified by financial assets and
liabilities (including derivative financial instruments) and contingent
consideration assumed in a business combination, which are measured at
fair value, together with the defined benefit obligation, which is measured at
the fair value of plan assets less the present value of pension liabilities.
Having assessed the principal risks and the other matters discussed
in connection with the Viability Statement on page 47, the Directors
considered it appropriate to adopt the going concern basis of accounting in
preparing the financial statements.
The preparation of financial statements in conformity with IFRS requires the
use of certain critical accounting estimates. It also requires management to
exercise its judgement in the process of applying the Group’s accounting
policies. The areas involving a higher degree of judgement or complexity,
or areas where assumptions and estimates are significant to the financial
statements are disclosed in Note 1(c).
128 Ricardo plc Annual Report & Accounts 2018/19
Changes in accounting policies
The issued standards, amendments and interpretations shown
below are mandatory for the first time for the financial year
ended 30 June 2019:
Issued standards, amendments and
interpretations effective for this
financial year
Effective date
(periods
commencing)
Endorsed
by EU
Yes
Yes
Yes
Yes
Yes
Yes
Issued International Financial Reporting Standards
IFRS 9 Financial Instruments
IFRS 15 Revenue from Contracts
with Customers (including
amendments and clarifications)
1 Jan 2018
1 Jan 2018
Amendments and Interpretations to
International Financial Reporting Standards
IAS 40 Investment Property: Transfers
1 Jan 2018
1 Jan 2018
1 Jan 2018
1 Jan 2018
of Investment Property
IFRS 2 Share-based Payment:
Classification and Measurement
of Share-based Payment
Transactions
IFRS 4 Insurance Contracts: Applying
IFRS 9 Financial Instruments with
IFRS 4 Insurance Contracts
Annual Improvements to IFRS
Standards 2014-2016 Cycle:
IFRS 1 First-time Adoption of
International Financial Reporting
Standards and IAS 28 Investments
in Associates and Joint Ventures
IFRIC 22 Foreign Currency
Transactions and Advance
Consideration
1 Jan 2018
Yes
None of the amendments and interpretations of existing standards have
had, or are expected to have, any significant impact on these financial
statements. The impact of issued standards which have had a significant
impact on these financial statements are disclosed below and on the
following page:
IFRS 15 Revenue from Contracts with Customers
IFRS 15 Revenue from Contracts with Customers replaces both
IAS 11 Construction Contracts and IAS 18 Revenue and establishes
principles for reporting the nature, amount and timing of revenue
arising from contracts with customers. The principal areas of revenue
recognition that were impacted related to the identification of
performance obligations and whether those obligations were distinct
within the context of the contract. Types of contracts were identified
which had distinct performance obligations that required separate
revenue recognition treatment under IFRS 15, while other types of
contracts were identified which had indistinct performance obligations
that required a combined revenue recognition treatment under IFRS 15.
The Standard became effective for the Group as at 1 July 2018 and the
Group has applied the full retrospective approach upon adoption of
IFRS 15. This approach requires all open contracts with customers that are
presented in the financial statements to be transitioned under the new
Standard. Comparative information has been restated, together with a
cumulative adjustment to retained earnings as at 1 July 2017.
See Note 38(a) for further information.
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments:
Recognition and Measurement. The Standard includes requirements for
the recognition and measurement, impairment and derecognition of
financial assets and liabilities, together with general hedge accounting.
The primary area of change is that financial assets are now assessed for
impairment using an ‘expected credit loss’ model, which assumes that
1 Accounting policies (continued)
(a) Basis of preparation (continued)
IFRS 9 Financial Instruments (continued)
every trade receivable and contract asset, such as amounts recoverable
on contracts (‘AROC’), carries with it some risk of default at the point
of origination that increases as the unpaid asset ages. The ‘simplified
approach’ of the Standard applies a ‘default rate’ to trade receivables
and contract assets, which considers both past experience and future
expectations of credit losses. The ‘general approach’ of the Standard
applies to other financial assets.
The Group is unable to apply IFRS 9 retrospectively and without the use of
hindsight, and therefore comparative information has not been restated.
An adjustment for the transitional impact has been applied to opening
retained earnings as at 1 July 2018. See Note 38(b) for further information.
The Group did not adopt hedge accounting under IAS 39, resulting in no
transitional impact to opening retained earnings. The hedge accounting
requirements of IFRS 9 have been adopted prospectively as at 1 July 2018.
This has resulted in the recognition of foreign exchange movements
arising from hedged items and their corresponding designated cash
flow hedges within other comprehensive income as opposed to the
income statement.
Issued standards, amendments and interpretations that are not yet
effective have not been early adopted, but where these are expected to
have a material impact on the financial statements, this is disclosed in
Note 1(x).
(b) Basis of consolidation
The consolidated financial statements comprise the financial statements
of the Company and the Group are prepared to the end of the financial
year. Subsidiaries are all entities (including structured entities) over which
the Group has control. The Group controls an entity when the Group is
exposed to, or has rights to, variable returns from its involvement with the
entity and has the ability to affect those returns through its power over the
entity. Subsidiaries are fully consolidated from the date on which control
is transferred to the Group and are deconsolidated from the date that
control ceases. Intercompany transactions and balances are eliminated on
consolidation.
The Group applies the acquisition method of accounting for business
combinations. The consideration transferred for an acquisition is the fair
value of the assets acquired and the liabilities assumed. The consideration
transferred includes the fair value of any asset or liability resulting from
a contingent consideration arrangement. Contingent consideration
dependent upon the employment or retention of specific individuals is
expensed over the specified period and included within specific adjusting
items. Identifiable assets acquired, together with liabilities and contingent
liabilities assumed in a business combination are measured initially at
their fair values at the acquisition date. Acquisition-related expenditure is
expensed as incurred.
(c) Management judgements and key accounting estimates
The preparation of financial statements under IFRS requires the Group’s
management to make judgements and estimates that affect the
application of accounting policies and the reported amounts of assets,
liabilities, revenues and costs.
These judgements and estimates are continually evaluated and are based
on historical experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
Critical judgements in applying the Group’s accounting policies
The following are the critical judgements, apart from those involving
estimations (which are dealt with separately on the following page), that
the Directors have made in the process of applying the Group’s accounting
policies and that have the most significant effect on the amounts
recognised in the financial statements:
Notes to the financial statements
Acquisition accounting
The fair value of contingent consideration payable for post-acquisition
financial performance of acquired businesses against agreed targets during
an earn-out period, as defined by a sale and purchase agreement, requires
judgement and is based on a probability-weighted and discounted
assessment as at the acquisition date and recognised at the reporting date
as goodwill. The difference between goodwill recognised and earn-out
payments made, together with any arrangement that is wholly or partially
contingent on the continuing employment of specific individuals, is
charged to the income statement as a specific adjusting item as incurred
on a pro rata basis, as set out in Note 4. The use of different assumptions
could change the fair value of contingent consideration recognised as
goodwill and the amounts chargeable to the income statement. Further
details are given in Notes 12 and 13.
Other intangible assets include acquired intangible assets which primarily
relate to customer contracts and relationships arising from business
combinations. The significance of these assets relative to the Group’s
financial position requires critical judgements to be exercised in their
identification, initial recognition and subsequent measurement. The
identification of these assets separable from goodwill and their expected
useful lives are considered as part of pre-acquisition due diligence
processes and post-acquisition activities carried out with management
of acquired businesses. The fair value of identified acquired intangible
assets is determined through the use of appropriate valuation techniques,
including the excess earnings method, for which an expectation of
discounted future cash flows is derived from a combination of due
diligence reports and post-acquisition management forecasts and business
plans, together with other readily available sources of financial information.
The subsequent amortisation of acquired intangible assets is charged to
the income statement as a specific adjusting item, as set out in Note 4. The
use of different assumptions could change the fair value used in the initial
recognition of acquired intangible assets and the amounts chargeable to
the income statement. Further details are given in Notes 12 and 14.
Recoverability of capitalised development costs
Judgement is required as to when development costs meet the criteria
to be recognised as intangible assets. The majority of capitalised
development costs relate to the development of software, products and
other technology, tools and processes. These costs are recognised as
an asset once it has been determined that the attributable expenditure
can be measured reliably, that there is an intention and the necessary
resources to complete development and that it is considered probable
that the resulting asset will generate future economic benefits for the
Group. Determining whether it is probable that the resulting asset will
generate sufficient economic benefits in the future requires management
judgement. Further details are given in Note 14.
Impairment of financial assets
Management has applied judgement to rebut the presumption of IFRS 9
Financial Instruments that default does not occur later than when a financial
asset is 90 days past due. This is based upon the Group’s customer profile
and limited experience of bad debts, which demonstrates that although
debts can become significantly overdue, they are rarely irrecoverable.
The default rate used for each overdue period is reassessed annually and
is based upon the Group’s historic ageing profile, adjusted for forward-
looking information. Further details are given in Note 18.
Current taxation
Legislation related to taxation is complex and the Group’s taxation charge,
as set out in Note 9, may be uncertain. In preparing the Group’s financial
statements, management makes judgements on the existence of risks,
primarily in respect of permanent establishment and transfer pricing,
having taken appropriate professional advice. Although uncertainty of
estimates made on individual risks is not considered to be significant,
determination of an agreed amount of taxation payable may take several
years, and the final amount paid may differ from the liabilities recorded in
these financial statements.
Creating a world fit for the future 129
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Notes to the financial statements
1 Accounting policies (continued)
Defined benefit obligation
(c) Management judgements and key accounting estimates
(continued)
Deferred taxation
The extent to which deferred tax assets should be recognised requires
management to exercise judgement over their recoverability. Further
details are given in Note 25.
Key sources of estimation uncertainty
Estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current and
future periods. The areas involving significant risk of a material adjustment
to the carrying amounts of assets and liabilities within the next financial
year are as follows:
Revenue recognition on fixed price contracts
A significant proportion of revenue recognised within the Technical
Consulting segment relates to the provision of consultancy services
under fixed price contracts, where revenue is measured on each distinct
performance obligation on a percentage of completion basis.
The identification and separate accounting of distinct performance
obligations within the context of a contract is considered to be a critical
judgement. Fixed price contracts often have multiple performance
obligations that are indistinct from one another within the context of the
contract. This is due to a homogeneous pattern of transfer of control to the
customer who is unable to benefit from the performance of less than all
of the promises set out in the contract. This is particularly the case where
any intellectual property created is stipulated as not being owned by the
customer until the full transaction price has been paid.
The percentage of completion basis of revenue recognition is determined
as actual costs incurred as a proportion of total forecast contract costs to
complete. This method places importance on the accuracy of uncertain
estimates, including total costs to complete, the outcome of contract
and technical risks, as well as the extent to which variation requests
are recognised for proposed changes to the agreed schedule, price or
scope of a contract under negotiation with a customer at the reporting
date. Changes in these estimates may impact revenue recognised at
the reporting date with the revenue recognition in the reporting period
appropriately adjusted as required.
The actual outcome of wholly or partially unsatisfied performance
obligations may differ to the estimate made at a reporting date and it is
reasonably possible that outcomes on these contracts within the next
reporting period could differ, adversely or favourably, in aggregate to those
estimated. It is not possible to fully quantify the expected impact of this,
but the estimated costs to complete reflect management’s best estimate
at that point in time and no individual estimate is expected to have a
materially different outcome.
As set out further on pages 45 and 86, management undertakes a process
to assess the risks on inception of all contracts within the Technical
Consulting segment and then monitors and reviews the risks and
performance of contracts as they progress to completion. The highest
value, highest risk, most technically complex and financially challenging
contracts to deliver, as measured against a number of quantitative and
qualitative factors, are categorised as ‘Red Category 4’ contracts, which are
subject to more frequent and senior levels of management review.
As at 30 June 2019, the number of live contracts within the Technical
Consulting portfolio was in excess of 3,000 (2018: 3,000), with a total value
in excess of £700m (2018: £750m). Of this portfolio of contracts, 7 contracts
(2018: 11) were categorised as Red Category 4. At 30 June 2019, £3.9m (2018:
£3.9m) of recoveries for work performed on these contracts were under
negotiation with the customer and had been recognised as revenue.
Provisions of £1.7m (2018: £1.0m) were recognised against these recoveries,
resulting in a net exposure of £2.2m (2018: £2.9m).
130 Ricardo plc Annual Report & Accounts 2018/19
The Group operates a defined benefit pension scheme that provides
benefits to a number of current and former employees. This scheme
is closed to new entrants and the accrual of future benefits for active
members ceased at the end of February 2010. The value of the deficit is
particularly sensitive to the market value of the scheme’s assets, discount
rates and actuarial assumptions related to mortality. The sensitivity of the
defined benefit obligation to changes in the principal assumptions is set
out in Note 24.
(d) Segmental reporting
Operating segments are reported in a manner consistent with the discrete
financial information that is internally reported and provided to the Chief
Operating Decision Maker, who is responsible for allocating resources and
assessing performance of the operating segments. Further details are given
in Note 2.
(e) Revenue
Principle approach
The Group principally earns revenue through the provision of consultancy
services and bespoke products and recognises revenue based on the
satisfaction of performance obligations in contracts with its customers.
The core principle is that revenue is recognised in a manner that depicts
the transfer of promised goods and services to customers in an amount
that reflects the consideration to which the Group expects to be entitled in
exchange for those goods and services.
A contract with a customer is considered to exist when the Group is in
possession of documentation to provide an agreed scope of goods or
services on mutually understood terms and conditions that are acceptable
to the Group which, subject to the successful execution of the contract,
is expected to be invoiced against and paid for by the customer. Each
contract with a customer is assessed to identify the promises to transfer
distinct goods or services, or a series of distinct goods or services, that
are substantially the same and have the same pattern of transfer to the
customer. Goods and services are distinct and accounted for as separate
performance obligations if they are separately identifiable in the contract
and if the customer can benefit from them, either on their own or together
with other readily available resources.
The total transaction price for a contract is estimated as the amount of
consideration to which the Group expects to be entitled in exchange for
transferring the promised goods or services to the customer, excluding
sales taxes. Where multiple distinct performance obligations are identified
within a contract with a customer, the total transaction price is allocated
to each of the distinct performance obligations in proportion to their
relative stand-alone selling prices. Given the bespoke nature of many of
the Group’s products and services, which are designed or manufactured
under contract to the customer’s individual scope and specifications, there
are typically no observable stand-alone selling prices. Instead, stand-alone
selling prices are typically estimated based on expected costs plus contract
margin.
Costs of fulfilling performance obligations on existing contracts with
customers are expensed as incurred. Costs incurred in advance of
obtaining a new contract or an anticipated contract that directly relate to
the fulfilment of specific performance obligations are initially recognised as
an asset and subsequently expensed once the new contract is obtained or
obtaining the contract is no longer anticipated. Incremental costs incurred
to obtain new contracts with customers are recognised as an asset and
amortised consistently with the recognition of revenue over the contract
term, providing the contract term is greater than one year, the costs are
only incurred as a direct result of the new contract being obtained, and
the costs do not directly relate to the fulfilment of specific performance
obligations. Costs incurred to obtain new contracts with customers are
expensed when those costs are incurred irrespective of whether a contract
is obtained from a customer.
Revenue is recognised as distinct performance obligations are satisfied and
as control of the goods or services is transferred to the customer. For each
distinct performance obligation within a contract, the Group determines
whether they are satisfied over time or at a point in time. Performance
1 Accounting policies (continued)
(e) Revenue (continued)
Principle approach (continued)
obligations are considered to be satisfied over time if the goods or services
provided have no alternative use to the Group and there is an enforceable
right to payment for performance completed to date, or the customer
simultaneously receives and consumes the goods or services as the Group
provides them.
Services provided under fixed price contracts
The majority of the Group’s revenue in Technical Consulting is earned
from contracts for the provision of consultancy services that are typically
awarded on a fixed price basis. Low volumes of similar contracts are also
awarded to Performance Products to design and set up production lines
and supply chains. Services provided under a fixed price contract generally
have a single distinct performance obligation, or a single distinct series
of performance obligations, which is satisfied over time. For each distinct
performance obligation recognised over time, revenue is recognised using
an input method, based on total costs incurred to date as a percentage of
total estimated costs to satisfy each performance obligation.
Revenue and attributable margin are calculated by reference to reliable
estimates of transaction price and total expected costs, after making
suitable allowances for technical and other risks. Revenue and associated
margin are therefore recognised progressively as costs are incurred, and
estimated costs to complete are updated regularly as anticipated risks are
mitigated or unanticipated risks materialise. The Group has determined
that this method faithfully depicts the Group’s performance in transferring
control of the services to the customer.
The transaction price generally does not include consideration resulting
from contract modifications of distinct performance obligations, such as
variation orders, until they have been approved by the customer. Variable
consideration, such as for the achievement of performance targets or
variation requests under negotiation with the customer at the reporting
date, can be included in the transaction price together with the estimated
costs to perform the associated obligations. These estimates of the
expected value or most likely amount are recognised to the extent that it
is highly probable that there will not be a significant reversal in the amount
of cumulative revenue recognised in a future reporting period.
Changes in transaction price from contract modifications that do not
create separate distinct performance obligations are added to the
transaction price of pre-existing performance obligations to which the
modification relates. Contract modifications for goods or services that
do create separate distinct performance obligations are accounted for
separately from pre-existing performance obligations, together with the
expected costs to satisfy those separate distinct performance obligations.
Contract assets arising from the recognition of revenue as and when
performance obligations are satisfied are initially recognised as accrued
revenue or amounts recoverable on contracts (‘AROC’) within trade,
contract and other receivables, and transferred to trade receivables when
invoiced. Contract liabilities arising from amounts received from customers
for services not yet performed are initially recognised as deferred revenue
or payments received in advance on contracts (‘POA’) within trade, contract
and other payables, and transferred to revenue as and when performance
obligations are satisfied.
A loss on a distinct performance obligation is recognised immediately
when it becomes probable that the total estimated directly attributable
costs to satisfy the distinct performance obligation will exceed the
transaction price allocated to that distinct performance obligation.
Monthly reviews of contracts by local management, in conjunction with
reviews by senior management of contracts deemed to be of higher risk,
ensure that the Group identifies and immediately recognises expected
losses on fixed price performance obligations within a contract.
Services provided under time and materials contracts
Certain contracts within Technical Consulting for the provision of
consultancy services may be awarded on a time and materials basis.
Services provided under a time and materials basis typically have a single
distinct performance obligation to provide a variable amount of labour to
Notes to the financial statements
the customer at an agreed set of time-based labour rates, which represents
the sales value. Revenue is therefore recognised over time based upon
the agreed sales value of the time worked and costs incurred to date, as
the customer simultaneously receives and consumes these services as the
Group provides them.
Services provided under subscription and software support contracts
Other contracts within Technical Consulting primarily relate to annual
subscriptions by customers to emergency response and support services
for chemical incidents and crisis management. Subscription services
are considered to be a single distinct performance obligation for which
revenue is recognised at the agreed transaction price on a straight-line
basis over the period of subscription.
Revenue is recognised primarily within Performance Products for software
maintenance and support services separately from the supply of software
products on a straight-line basis over the period of maintenance and
support. Revenue derived from the supply of ad hoc software-related
services, such as training and application engineering, is recognised at
the agreed transaction price on a straight-line basis over a typically short
period during which the obligation is performed.
Supply of manufactured or assembled products
The majority of the Group’s revenue in Performance Products is earned
from the supply of manufactured or assembled high-performance
products, some of which are supplied with assurance-type warranties.
Revenue for the supply of these products is measured at the agreed
transaction price per unit that is expected to flow to the Group, and is
recognised at the point in time that the Group has transferred control of
the products to the customer, which is typically on delivery or collection.
The point in time at which revenue is recognised can vary based on the
specific incoterms present in a contract with a customer.
Revenue recognised from bill-and-hold arrangements occurs when all
performance obligations have been satisfied and there is a substantive
reason for the arrangement, which is typically that the customer has
requested the products to be held by the Group until such times as
delivery or collection is required by the customer. Revenue is recognised
and billed under usual payment terms when the customer formally
agrees to accept control of the bespoke products which cannot be sold to
another customer and provided that the products have been separately
identified and made available for delivery or collection.
Supply of software products
The Group’s software products are standard version controlled computer-
aided design, engineering and analysis tools, available for general sale and
are primarily sold through Performance Products. The majority of revenue
is derived from new and renewed licences of these software products,
for which the customer has the right to access the product during the
licence period, including rolling releases of the latest functionality. A new
or renewed licence is considered to be a single distinct performance
obligation for which revenue is recognised at the agreed transaction price
on a straight-line basis over the licence period.
Perpetual licence sales provide the customer with an indefinite right to use
the product, excluding rolling releases of the latest functionality. Rolling
releases are provided through the separate provision of maintenance and
support services. The transaction price of these two distinct performance
obligations are separately identifiable within a contract. Revenue is
recognised for perpetual licence sales when the performance obligation is
satisfied, being the point of delivery of the licence key to the customer.
(f) Research and development expenditure
Research and development expenditure is recognised as an administrative
expense in the income statement in the year in which it is incurred and
is disclosed in Note 5. Where the activity is performed for customers the
cost is recognised as a cost of sale. Directly attributable development
expenditure that meets the criteria for recognition as an intangible asset is
described in Note 1(o).
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Notes to the financial statements
1 Accounting policies (continued)
(g) Government grants
The Group receives income-related grants from various national and
supranational government agencies, principally for credits in respect
of qualifying research and development expenditure, together with
funding of research and development and capital projects. A grant is not
recognised in the income statement until there is reasonable assurance
that the Group will comply with its conditions and that the grant will be
received. Grants are presented in the income statement as a deduction
from the related expenses.
Grants contributing to the cost of an asset are deducted from the cost of
the asset and reflected in its depreciation throughout its useful life.
Grants are not normally received until after qualification conditions have
been met and the related expenditure has been incurred. Where this is not
the case, they are recorded within trade, contract and other payables either
as payments received in advance on contracts or as deferred revenue.
(h) Pension costs
The Group operates one defined benefit and several defined contribution
pension schemes, the assets of which are held in separately administered
funds. The defined benefit pension scheme is closed to new entrants and
the accrual of future benefits for active members ceased at the end of
February 2010. Payments to defined contribution pension schemes are
charged as an expense as they fall due. Differences between contributions
payable in the year and contributions actually paid are included in either
accruals or prepayments. Payments to state-managed pension schemes
are dealt with as payments to defined contribution pension schemes as the
Group’s obligations under the schemes are similar in nature.
For the defined benefit pension scheme, the cost of providing benefits
is determined using the projected unit credit method, with actuarial
valuations being carried out at each reporting date. Remeasurements are
recognised in other comprehensive income except where they result from
settlements or curtailments, in which case they are reported in the income
statement.
Where necessary, past service costs are recognised immediately in
the income statement at the earlier of when the plan amendment or
curtailment occurs and when the related restructuring costs or termination
benefits are recognised. The defined benefit obligation recognised
represents the present value of the pension scheme liabilities net of the fair
value of scheme assets. Any asset resulting from this calculation is limited to
past service cost, plus the present value of available refunds and reductions
in future contributions to the plan.
The interest cost on the net defined benefit obligation for the year is
determined by applying the discount rate used to measure the defined
benefit obligation at the beginning of the year to the net defined benefit
obligation at the end of the year, and is included in finance costs.
(i) Share-based payments
Equity-settled share-based payments are measured at fair value at the
date of grant. The fair value determined at the grant date is expensed
on a straight-line basis over the vesting period. The amount expensed is
adjusted over the vesting period for changes in the estimate of the number
of shares that will eventually vest, save for changes resulting from any
market-related performance conditions.
Cash-settled share-based payments are measured at fair value at the date
of grant and expensed over the vesting period until the vesting date with
the recognition of a corresponding liability. The liability is remeasured to fair
value at each reporting date up to and including the settlement date, with
changes in fair value recognised in the income statement for the year. The
amount expensed is adjusted over the vesting period for changes in the
estimate of the number of shares that will eventually vest.
Fair value is measured by using the Monte Carlo and Black Scholes models
as explained in Note 29. The expected life used in the models are adjusted
for the effects of exercise restrictions and behavioural considerations.
132 Ricardo plc Annual Report & Accounts 2018/19
(j) Leases
The costs of operating leases and amortisation of operating lease
incentives are charged to the income statement on a straight-line basis
over the period of the lease.
(k) Foreign currency
Transactions
The functional currency of the Company and the presentation currency of
the Group is Pounds Sterling. The functional currency of each subsidiary
is the currency of the primary economic environment in which the entity
operates. Transactions in currencies other than the functional currency are
recorded at prevailing exchange rates. At each reporting date, monetary
assets and liabilities denominated in foreign currencies are retranslated
at the rates prevailing on the reporting date. Non-monetary assets and
liabilities denominated in foreign currencies are translated at the rates
prevailing at the date when the transaction occurred. Gains and losses
arising on retranslation and settlements are included in the income
statement for the year.
Consolidation
On consolidation the assets and liabilities of foreign operations, including
goodwill and fair value adjustments, are translated into the presentation
currency at exchange rates prevailing on the reporting date. Revenues
and costs are translated at the average exchange rates of the year unless
exchange rates fluctuate significantly. All resulting exchange differences
are recognised in other comprehensive income and the translation reserve
within equity. On disposal of an operation, or part thereof, the related
cumulative translation differences are recognised in the income statement
as a component of the gain or loss arising on disposal.
(l) Taxation
The tax expense for the year comprises current and deferred tax. Tax is
recognised in the income statement, except to the extent that it relates to
items recognised in other comprehensive income or directly in equity.
The current tax charge is the expected tax payable on taxable income for
the year, calculated using the average rate applicable for the year on the
basis of the tax laws enacted or substantively enacted at the reporting
date in the countries where the Group operates. The current tax charge
also includes any adjustment to tax payable in respect of previous years.
Management periodically evaluates uncertain positions taken in tax returns
with respect to situations in which applicable tax regulation is subject to
interpretation and establishes provisions where appropriate on the basis of
amounts expected to be paid to the relevant tax authorities.
The Group submits annual claims in respect of the UK Government’s
Research and Development Expenditure Credit (‘RDEC’) scheme. RDEC is
taxable income and is a form of government grant that effectively gives
corporation tax relief on qualifying research and development (‘R&D’)
expenditure. In accordance with IAS 20 Accounting for Government Grants
and Disclosure of Government Assistance, credits receivable under the RDEC
scheme are offset against the associated qualifying R&D expenditure
incurred, both of which are included within operating profit.
Deferred tax is recognised on temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and
the amounts used for taxation purposes. Deferred tax liabilities are not
recognised if they arise from the initial recognition of goodwill. Deferred
tax is not accounted for if it arises from the initial recognition of an asset
or liability in a transaction other than a business combination that at the
time of the transaction affects neither accounting nor taxable profit and
differences relating to investments in subsidiaries to the extent that it is
not probable that they will reverse in the foreseeable future. The amount
of deferred tax provided is based on the expected manner of realisation or
settlement of the carrying amount of assets and liabilities, using tax rates
enacted or substantively enacted at the reporting date.
Deferred tax assets are recognised only to the extent that it is probable that
taxable profits will be available in the foreseeable future against which the
asset can be utilised. Deferred tax assets are reduced to the extent that it is
no longer probable that the related tax benefit will be realised within the
foreseeable future.
1 Accounting policies (continued)
(m) Dividends
Dividends are recognised as a liability in the year in which they are fully
authorised. Interim dividends are recognised when paid.
(n) Goodwill
Goodwill arises on the acquisition of subsidiaries and represents the excess of
the consideration transferred and the fair value of contingent consideration,
over the fair value of the identifiable assets acquired and liabilities assumed.
Goodwill arising on acquisitions denominated in foreign currencies is
retranslated using exchange rates prevailing at each reporting date.
Goodwill is recognised as an asset and is carried at cost less accumulated
impairment losses. It is not subject to amortisation, but is reviewed
for impairment annually, or more frequently if events or changes in
circumstances indicate a potential impairment. For the purpose of
impairment testing, goodwill acquired in a business combination is
allocated to each of the cash-generating units (‘CGUs’), or groups of CGUs,
that is expected to benefit from that business combination. Each CGU or
group of CGUs to which goodwill is allocated represents the lowest level at
which goodwill is monitored for internal management purposes.
The Group’s impairment review compares the carrying value of the
goodwill to the recoverable amount of the CGU to which the goodwill has
been allocated. The recoverable amount is the higher of the value in use
or the fair value less costs of disposal. Estimating the value in use requires
the Directors to perform an assessment of the discounted future cash
flows that the CGU is able to generate. An impairment is deemed to have
occurred where the recoverable amount of a CGU is less than the carrying
value of the allocated goodwill. Any impairment is recognised immediately
in the income statement and is not subsequently reversed. On disposal
of an operation, the attributable amount of goodwill is included in the
determination of the gain or loss on disposal.
(o) Other intangible assets
Acquired intangible assets
Acquired intangible assets that are either separable or arising from
contractual rights are recognised at fair value at the date of acquisition,
and subsequently at amortised cost. Such intangible assets include
customer contracts and relationships, together with acquired software and
technology. The fair value of acquired intangible assets is determined by
use of appropriate valuation techniques.
Software
Purchased software is capitalised on the basis of the purchase price of the
software product plus any external and internal costs subsequently incurred
that are directly attributable to bring the software product to the condition
necessary for it to be capable of operating in the manner intended.
Development costs
Directly attributable costs which are incurred in the development of
certain assets are capitalised and amortised over their finite useful lives
once the Group has determined that it has the intention and the necessary
resources to complete the relevant project, that it is probable the resulting
asset will generate economic benefits for the Group and the attributable
expenditure can be reliably measured.
Amortisation
Amortisation is typically calculated using the straight-line method to
allocate the cost of intangible assets over their estimated useful lives, as
follows:
• Acquisition-related intangible assets:
• Customer contracts and relationships
• Software and technology
• Software
• Development costs
Between 3 and 9 years
Between 5 and 7 years
Between 2 and 10 years
Between 3 and 5 years
Notes to the financial statements
For certain assets classified as development costs in the Group’s
Performance Products operating segment, amortisation is charged on a
units of production basis, as this is considered to more accurately reflect
the expected pattern of consumption of the future economic benefits
embodied in the assets.
Assets under construction are carried at cost less any impairment in value,
and are included in the relevant asset category. Amortisation of these
assets commences when they are available for their intended use or sale.
(p) Property, plant and equipment
Property, plant and equipment is stated at historical cost less depreciation.
The gross cost of an item of property, plant and equipment is the purchase
price and any costs directly attributable to bring the asset to the location
and condition necessary for it to be capable of operating in the manner
intended. Grants contributing to the cost of an asset are deducted from the
cost of the asset and reflected in its depreciation throughout its useful life.
Depreciation is typically calculated using the straight-line method to
allocate the cost of items of property, plant and equipment less any
residual value, over their estimated useful lives, as follows:
• Freehold land
Not depreciated
• Freehold buildings including fixed plant
Between 25 and 50 years
• Leasehold property including fixed plant Over the term of the lease
• Plant and machinery
Between 4 and 10 years
• Fixtures, fittings and equipment
Between 2 and 10 years
The residual values and useful lives of assets are reviewed, and adjusted if
appropriate, at the end of each reporting period.
For certain assets classified as plant and machinery in the Group’s
Performance Products operating segment, depreciation is charged on a
units of production basis, as this is considered to more accurately reflect
the expected pattern of consumption of the future economic benefits
embodied in the assets.
Assets under construction are carried at cost less any impairment in value,
and are included in the relevant asset category. Depreciation of these
assets commences when they are available for their intended use or sale.
(q) Non-current assets held for sale
Non-current assets are classified as held for sale when their carrying
amount is to be recovered principally through a sale transaction, rather
than through continuing use, and a sale is considered highly probable
within twelve months of their classification as held for sale. They are stated
at the lower of their carrying amount and fair value less costs to sell. An
impairment loss is recognised in the income statement for any initial or
subsequent write-down of the assets to fair value less costs to sell. A gain
is recognised in the income statement for any subsequent increases in
fair value less costs to sell an asset, but not in excess of any cumulative
impairment losses previously recognised.
A gain or loss not previously recognised by the date of the sale of the
non-current assets is recognised in the income statement at the date of
derecognition. Non-current assets are not depreciated or amortised while
they are classified as held for sale and are presented separately from other
non-current assets.
(r) Investments
Investments in subsidiaries are stated at cost less any impairment in value.
(s) Impairment of non-financial assets
Intangible assets that have an indefinite useful life or that are not available
for use or sale are not subject to amortisation and are tested annually
for impairment. Other intangible assets and items of property, plant and
equipment with finite useful lives are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may
not be recoverable.
Creating a world fit for the future 133
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Notes to the financial statements
1 Accounting policies (continued)
(s) Impairment of non-financial assets (continued)
An impairment loss is recognised for the amount by which the carrying
amount of the asset exceeds its recoverable amount. The recoverable
amount is the higher of the fair value less costs to sell of the asset and its
value in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks
specific to the asset for which the estimates of future cash flows have not
been adjusted. Where assets do not generate cash flows independently
from other assets, the Group estimates the recoverable amount of the
cash-generating unit to which the asset belongs.
If the recoverable amount of an asset or cash-generating unit is estimated
to be less than its carrying amount, the carrying amount of the asset
or cash-generating unit is reduced to its recoverable amount. Prior
impairments of non-financial assets are reviewed for possible reversal at
each reporting date, other than goodwill.
(t) Inventories
Inventories are stated at the lower of cost, including attributable overheads
allocated on the basis of normal operating capacity, and net realisable
value. Cost is calculated using the ‘weighted average’ method in Technical
Consulting and the ‘first-in, first-out’ method in Performance Products.
(u) Financial instruments
Non-derivative financial instruments
The Group’s non-derivative financial instruments comprise trade
receivables, trade payables, amounts owed by and to fellow Group
undertakings (for standalone subsidiaries within the Group), cash and cash
equivalents and borrowings. Cash and cash equivalents comprise cash
balances and bank overdrafts repayable on demand. Bank overdrafts are
shown within borrowings in current liabilities and bank loans and finance
leases are shown within borrowings in either current liabilities or non-
current liabilities depending on the maturity date.
Financial assets are measured initially at fair value, and subsequently at
amortised cost. Trade receivables are stated net of impairment and for
the purposes of impairment testing includes the non-financial contract
assets of amounts recoverable on contracts (‘AROC’) and accrued revenue.
These assets are assessed for impairment using the ‘simplified approach’
to the ‘expected credit loss’ model, which applies a ‘default rate’ at the
point of origination that increases as the unpaid asset ages. Although past
experience of significant credit losses on these assets has been negligible,
the impairment assessment considers both past experience and future
expectations of credit losses. As a result of this assessment,
the Group considers the risk of expected credit losses on contract assets to
be immaterial.
Trade receivables and contract assets are provided in full and subsequently
written off when there is no reasonable expectation of recovery. Indicators
that there may be no reasonable expectation of recovery could include,
amongst others, evidence that the customer has entered administration or
liquidation proceedings, or the persistent failure of a customer to enter into
or adhere to a repayment plan.
The ‘general approach’ is applied to the impairment of other financial
assets, the amount of which is based on whether there has been a
significant deterioration in the credit risk of a financial asset.
Financial liabilities are classified as either amortised cost or fair value
through profit and loss. Borrowings are recognised initially at fair value
net of direct issue costs and subsequently at amortised cost. Differences
between initial value and redemption value are recorded in the income
statement over the period of the loan.
The fair values of all non-derivative financial instruments due for repayment
after more than one year are approximately equal to their carrying values.
The fair value of borrowings due for repayment after more than one year
134 Ricardo plc Annual Report & Accounts 2018/19
approximates to the carrying value as they are primarily floating rate loans
where payments are reset to market rates at regular short-term intervals.
IFRS 9 Financial Instruments became effective for the Group from 1 July
2018. Prior to this, trade receivables were stated net of allowances for
irrecoverable amounts. Evidence of impairment of trade receivables
included indications that customers was experiencing significant financial
difficulty or have significantly overdue balances.
Derivative financial instruments
The Group employs derivative financial instruments, including foreign
exchange contracts, to mitigate currency exposures on trading
transactions. Fair values of derivative financial instruments are based on the
market values of similar instruments at the reporting date.
The Group designates the fair value of foreign currency swap contracts
on intercompany loans as hedging instruments. The initial fair value is
determined with reference to the relevant spot market exchange rate.
The differential between the contracted strike rate and the discounted
spot market exchange rate is defined as the movement in fair value. Fair
value gains and losses on the remeasurement of cash flow derivatives
are hedge accounted and recognised in retained earnings through
other comprehensive income. The Group hedges the entire carrying
value of all intercompany loans denominated in foreign currencies, on
which credit risk is considered to be immaterial. Therefore, only when the
economic relationship fails or ceases to exist would the Group recognise
the net financial impact of the hedging instrument and the hedged item
as ineffective in the income statement. Changes in fair value of foreign
currency forward and option contracts that relate to hedged items are
recognised in retained earnings through the income statement,
together with the change in the fair value of the related hedge at the
reporting date.
Though the Group did not hedge account up to 30 June 2018, cash flow
derivatives held up to this date were used to manage foreign exchange
exposures. Prior to 1 July 2018 and the implementation of IFRS 9, the gain
or loss in fair value on remeasurement of all derivative financial instruments
was taken to the income statement.
(v) Provisions
Provisions are required for restructuring costs and employment-related
benefits when the Group has a present legal or constructive obligation
at the reporting date as a result of a past event and it is probable that
settlement will be required of an amount that can be reliably estimated.
Provisions for warranty costs are recognised at the date of sale of the
relevant products, at the Directors’ best estimate of the expenditure
required to settle the Group’s probable liability.
Other provisions reflect the Directors’ best estimate of future obligations
relating to legal claims and litigation, together with dilapidation costs for
the maintenance of leasehold properties arising from past events such as
lease renewals or terminations.
These estimates are reviewed at the reporting date and updated
as necessary.
(w) Specific adjusting items
Specific adjusting items are disclosed separately in the financial statements
where it is necessary to do so to provide further understanding of
the financial performance of the Group. These items comprise the
amortisation of acquired intangible assets, acquisition-related expenditure,
reorganisation costs and other non-recurring items that are included
due to the significance of their nature or amount. Acquisition-related
expenditure is incurred by the Group to effect a business combination,
including the costs associated with the integration of acquired businesses.
Reorganisation costs relate to non-recurring expenditure incurred as part
of fundamental restructuring activities. Further information is provided in
Note 4.
Notes to the financial statements
1 Accounting policies (continued)
(x) Issued standards, amendments and interpretations not yet effective
At 30 June 2019, the International Accounting Standards Board (‘IASB’) and IFRS IC had issued standards, amendments and interpretations as shown below,
that subject to adoption by the EU, are not yet effective and have not been adopted prior to the financial period commencing after their effective date.
Issued standards, amendments and interpretations not yet effective
Issued International Financial Reporting Standards
IFRS 16 Leases
IFRS 17 Insurance Contracts
Amendments and Interpretations to International Financial Reporting Standards
Annual Improvements to IFRS Standards 2015-2017 Cycle: IFRS 3 Business Combinations, IFRS 11 Joint Arrangements,
IAS 12 Income Taxes, and IAS 23 Borrowing Costs
IAS 19 Employee Benefits: Plan Amendment, Curtailment or Settlement
IAS 28 Investments in Associates and Joint Ventures: Long-term Interests in Associates and Joint Ventures
IFRIC 23 Uncertainty over Income Tax Treatments
IFRS 9 Financial Instruments: Prepayment Features with Negative Compensation
Amendments to References to the Conceptual Framework in IFRS Standards
IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors: Definition of Material
IFRS 3 Business Combinations: Definition of a Business
Effective date
(periods
commencing)
Endorsed
by EU
1 Jan 2019
1 Jan 2021
1 Jan 2019
1 Jan 2019
1 Jan 2019
1 Jan 2019
1 Jan 2019
1 Jan 2020
1 Jan 2020
1 Jan 2020
Yes
No
Yes
Yes
Yes
Yes
Yes
No
No
No
It is not expected that the adoption of the issued standards, amendments and interpretations listed above will have a significant impact on the financial
statements of the Group or the Company in future periods, with the exception of the following:
IFRS 16 Leases
Summary
IFRS 16 Leases becomes effective to the Group as at 1 July 2019 and replaces IAS 17 Leases. IFRS 16 introduces a single lease accounting model for lessees,
which requires the Group to recognise assets that represent its right to use underlying leased assets and liabilities that represent its obligation to make lease
payments for all of the Group’s operating leases, other than those that are short-term or low-value. Operating lease charges in the income statement will
largely be replaced by depreciation charges and finance costs.
In addition, the Group sublets a small number of its leased properties. Sublessor accounting remains similar but sublet properties need to be reassessed to
identify those that should be classified as finance leases under IFRS 16 and recognise these as assets that represent the net investment in sublet properties. No
significant impact is expected to the income statement from sublessor accounting.
Approach
Principally all of the Group’s leasing arrangements have been reviewed over the last year in light of the new accounting requirements of IFRS 16 and there are
approximately 150 active leases at the transition date across the Group that will be recognised as at 1 July 2019. It is estimated that over 95% of these right-
of-use assets and lease liabilities will be driven by approximately 50 active operating leases for the Group’s technical centres and office locations around the
world. The Group will adopt the modified retrospective approach to transition and will therefore not restate comparative information.
The Group expects to elect to adopt the following practical expedients on transition:
• Not to capitalise right-of-use assets or lease liabilities where the lease expires before 30 June 2020;
• Not to consider contracts other than those that were previously classified as leases;
• To utilise onerous lease provisions to reduce the right-of-use asset value;
• To use hindsight in determining the lease term where the contract contains renewal or termination options; and
• To exclude initial direct costs for the measurement of right-of-use assets.
Impact
The Group has assessed the estimated pre-tax impact that the initial application of IFRS 16 will have on its consolidated financial statements for the year
ending 30 June 2020 based on its portfolio of lease contracts as at 30 June 2019, as described below and on the following page:
Estimated impact on the Consolidated Statement of Financial Position as at 1 July 2019
Net investment in sublet property
Right-of-use assets:
- Leasehold property
- Plant and machinery
Prepayments
Accruals
Provisions
Lease liabilities:
- Current
- Non-current
Estimated impact on retained earnings
Group
£m
2.0
36.0
1.0
(2.0)
2.0
1.0
(5.0)
(40.0)
(5.0)
Creating a world fit for the future 135
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Notes to the financial statements
1 Accounting policies (continued)
(x) Issued standards, amendments and interpretations not yet effective (continued)
Impact (continued)
The right-of-use assets on transition will be lower than the lease liabilities due to a small number of longer term and higher value property leases that will
be measured on transition as if the new accounting requirements had always been applied, but using an incremental borrowing rate as at 1 July 2019.
This results in cumulative depreciation of these right-of-use assets to the date of transition being greater than the principal repayments of associated lease
liabilities from the commencement of the lease to the date of transition. The difference between the right-of-use assets and the lease liabilities on transition
will be taken to retained earnings. Remaining right-of-use assets will be measured at an amount equal to the lease liabilities on transition, adjusted for any
prepaid or accrued lease expenses and onerous lease provisions.
The lease liabilities that will be recognised on transition are lower than the non-cancellable future operating lease commitments disclosed in Note 34,
primarily due to the impact of discounting the future lease payments on a small number of long-term leases in the UK and the US in order to measure the
lease liabilities under IFRS 16. The weighted average incremental borrowing rate applied to the lease liabilities was 4.2%.
Estimated impact on the Consolidated Income Statement for the year ending 30 June 2020
Under IAS 17:
- Operating lease charges
Under IFRS 16:
- Operating lease charges
- Depreciation
Estimated impact on operating profit
- Finance costs
Estimated impact on profit before taxation
Group
£m
8.0
(1.0)
(6.0)
1.0
(2.0)
(1.0)
Estimated impact on the Consolidated Statement of Cash Flows for the year ending 30 June 2020
There is no overall impact on cash flows from the adoption of IFRS 16, but a change in presentation will see an improvement in the Group’s cash flows from
operating activities and a corresponding decline in cash flows from financing activities of approximately £5.0m. The Group does not expect the adoption of
IFRS 16 to impact on its ability to comply with its loan covenants.
The actual impact of adopting IFRS 16 as at 1 July 2019 may change as the Group has not finalised the development and implementation of its new IT system
to manage the Group's leases and produce the financial information required. The new accounting policies are subject to change until the Group presents its
first financial statements that include the date of initial application.
2 Operating segments
The Group's reported operating segments are based on the financial information provided to the Chief Operating Decision Maker who is the Chief
Executive Officer. The information reported includes financial performance but does not include the financial position of assets and liabilities. The operating
segments were identified by evaluating the Group’s products and services, processes, types of customers and delivery methods. The reportable segments
are Technical Consulting and Performance Products.
Technical Consulting
Technical Consulting generates revenue from the provision of engineering programmes and technical, environmental and strategic consultancy services.
This segment comprises consulting businesses in Automotive, Off-Highway & Commercial Vehicles, Rail, Energy & Environment, Defence, and Strategy.
These businesses have similar economic characteristics, as they each:
• provide a similar nature of services, with each segment providing technical consultancy services, with their respective cost bases being predominantly
direct and indirect payroll costs;
• provide their services across a number of different geographies and market sectors;
• have diverse client bases, from small to large companies, as well as a mixture of private and government-backed organisations; and
• have similar distribution channels and operate across markets requiring adherence to regulatory frameworks that are similar in nature.
We have therefore deemed it appropriate to aggregate the results of these consulting businesses into a single reportable Technical Consulting
operating segment.
Performance Products
Performance Products generates income from the production of low-volume and high-performance products, including bespoke engines, transmissions,
and virtual engineering software products. Performance Products can manage the complete supply chain for customers and earns revenue for either the
supply of products or for the provision of development, manufacturing or assembly services. This segment comprises businesses in High-Performance
Vehicles & Motorsport, Defence, and Software.
These businesses have been aggregated on the basis that they provide the development, manufacture or assembly of specific products, as opposed to
technical consultancy services, and face similar financial and competitive risks.
136 Ricardo plc Annual Report & Accounts 2018/19
Notes to the financial statements
2 Operating segments (continued)
Measurement of performance
Management monitors the financial results of its operating segments separately for the purpose of making decisions about allocating resources and
assessing performance. Segmental performance is measured based on operating profit, as this measure provides management with an overall view of how
the different operating segments are managing their total cost base against the revenue generated from their portfolio of contracts.
Included within Head Office in the following tables are functions managed by a central division, including the costs of running the public limited company,
which are recharged to the other operating segments.
Inter-segment revenue is eliminated on consolidation. Transactions are entered into on an arm's length basis in a manner similar to transactions with third parties.
For the year ended 30 June 2019
Total segment revenue
Inter-segment revenue
Revenue from external customers
Underlying operating profit
Specific adjusting items
Operating profit
Net finance costs
Profit before taxation
Depreciation and amortisation
Capital expenditure – other intangible assets
Capital expenditure – property, plant and equipment
Technical
Consulting
£m
Performance
Products
£m
Head Office
£m
271.5
(1.0)
270.5
27.7
(7.4)
20.3
-
20.3
10.1
2.9
3.5
118.6
(4.7)
113.9
11.9
-
11.9
-
11.9
3.9
5.9
3.9
-
-
-
-
(3.1)
(3.1)
(2.6)
(5.7)
1.4
0.3
0.2
Total
£m
390.1
(5.7)
384.4
39.6
(10.5)
29.1
(2.6)
26.5
15.4
9.1
7.6
Revenues from one customer represent approximately 19% of the Group's external revenue, which is primarily reported in the Performance Products segment.
For the year ended 30 June 2018 (restated)(1)
Total segment revenue
Inter-segment revenue
Revenue from external customers
Underlying operating profit
Specific adjusting items
Operating profit
Net finance costs
Profit before taxation
Depreciation and amortisation
Capital expenditure – other intangible assets
Capital expenditure – property, plant and equipment
Technical
Consulting
£m
Performance
Products
£m
Head Office
£m
287.1
(0.3)
286.8
30.4
(9.9)
20.5
-
20.5
12.2
3.9
7.5
95.8
(4.1)
91.7
9.3
-
9.3
-
9.3
2.1
2.2
0.6
-
-
-
-
(0.6)
(0.6)
(2.2)
(2.8)
1.6
0.4
0.1
Total
£m
382.9
(4.4)
378.5
39.7
(10.5)
29.2
(2.2)
27.0
15.9
6.5
8.2
Revenues from one customer represent approximately 16% of the Group's external revenue, which is primarily reported in the Performance Products segment.
(1) The prior year has been restated for IFRS 15 Revenue from Contracts with Customers, all of which relates to the Technical Consulting operating segment. See Note 38(a) for more details.
Non-current assets by geographical location (excluding deferred tax assets)
Asset location
United Kingdom
Netherlands
North America
Australia
Rest of the World
Total
2019
£m
97.2
20.3
15.8
27.7
8.8
169.8
2018
£m
97.2
21.0
16.2
-
8.1
142.5
Creating a world fit for the future 137
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Notes to the financial statements
3
Revenue
Disaggregation of revenue by:
(a) Stream
For the year ended 30 June
Services provided under:
- fixed price contracts
- time and materials contracts
- subscription and software support contracts
Goods supplied:
- manufactured or assembled products
- software products
Total revenue
(b) Customer location
For the year ended 30 June
United Kingdom
Mainland Europe
North America
China
Rest of Asia
Rest of the World
Total revenue
(c) Timing of recognition
For the year ended 30 June
Over time
At a point in time
Total revenue
2019
Technical
Consulting
£m
Performance
Products
£m
207.1
53.9
4.7
3.4
1.4
270.5
3.4
-
1.8
102.1
6.6
113.9
2019
Technical
Consulting
£m
Performance
Products
£m
79.9
73.7
48.8
30.6
25.8
11.7
270.5
72.5
22.7
12.5
0.3
5.6
0.3
113.9
2019
Total
£m
210.5
53.9
6.5
105.5
8.0
384.4
Total
£m
152.4
96.4
61.3
30.9
31.4
12.0
384.4
2018
Restated(1)
Performance
Products
£m
Technical
Consulting
£m
219.2
61.8
4.2
-
1.6
286.8
4.5
-
1.0
80.1
6.1
91.7
2018
Restated(1)
Technical
Consulting
£m
Performance
Products
£m
83.6
75.4
45.2
38.8
37.1
6.7
286.8
61.0
23.9
2.4
0.1
3.7
0.6
91.7
2018
Restated(1)
Technical
Consulting
£m
Performance
Products
£m
266.7
3.8
270.5
11.0
102.9
113.9
Total
£m
277.7
106.7
384.4
Technical
Consulting
£m
Performance
Products
£m
286.0
0.8
286.8
11.1
80.6
91.7
Total
£m
223.7
61.8
5.2
80.1
7.7
378.5
Total
£m
144.6
99.3
47.6
38.9
40.8
7.3
378.5
Total
£m
297.1
81.4
378.5
(1) The prior year has been restated for IFRS 15 Revenue from Contracts with Customers. See Note 38(a) for more details.
138 Ricardo plc Annual Report & Accounts 2018/19
For the year ended 30 June
United Kingdom
Mainland Europe
North America
China
Rest of Asia
Rest of the World
Total revenue
Technical
Performance
Consulting
Products
Technical
Consulting
Performance
Products
2019
£m
72.5
22.7
12.5
0.3
5.6
0.3
£m
79.9
73.7
48.8
30.6
25.8
11.7
Total
£m
152.4
96.4
61.3
30.9
31.4
12.0
£m
83.6
75.4
45.2
38.8
37.1
6.7
270.5
113.9
384.4
286.8
2018
Restated(1)
£m
61.0
23.9
2.4
0.1
3.7
0.6
91.7
Total
£m
144.6
99.3
47.6
38.9
40.8
7.3
378.5
4 Specific adjusting items
Amortisation of acquired intangible assets (Note 14)
Acquisition-related expenditure(1)
Reorganisation costs(2)
Guaranteed Minimum Pensions ('GMP') equalisation(3)
Total before tax
Tax credit on specific adjusting items
Derecognition of net deferred tax assets(4)
Total after tax
Notes to the financial statements
2019
£m
4.0
1.8
3.4
1.3
10.5
(1.6)
-
8.9
2018
£m
4.3
1.4
4.8
-
10.5
(0.9)
2.2
11.8
(1) Acquisition-related expenditure in the current and prior year comprised the costs of maintaining an internal acquisitions department which primarily incurred professional fees to effect acquisition
processes that were either successful (see Notes 12 and 39(a)) or unsuccessful, together with integration and employee retention costs on a pro rata basis in relation to previously acquired businesses.
(2) Reorganisation costs in the current and prior year comprised non-recurring expenditure incurred as part of a fundamental restructuring of the Group’s Technical Consulting business, primarily in
Automotive across the UK, Europe and the US. These costs comprised redundancy-related and dual-running costs in relation to headcount reductions and the establishment of a shared service centre.
In addition, contractor costs, professional fees, onerous contract costs and other non-recurring costs associated with asset disposals in the prior year and the subsequent scaling down of operations in
Germany are also included.
(3) In October 2018, the High Court issued a judgement confirming that pension schemes are required to equalise male and female members' benefits for the effect of GMP. The past service cost due to
GMP equalisation in the current year is considered to be non-recurring in nature and significant in its amount.
(4) In the prior year a net deferred tax asset which primarily comprised historical accumulated losses in Germany was derecognised. Due to the various restructuring actions taken in Germany during the
prior year, it was considered unlikely that sufficient taxable profits would be available in the foreseeable future against which the net deferred tax asset could be utilised.
Amortisation of acquired intangible assets and reorganisation costs are reported in the Technical Consulting segment. Third party acquisition-related
expenditure and GMP equalisation costs are reported in the Head Office segment. See Note 2 for further details.
5 Operating profit
The following items have been charged/(credited) to operating profit:
Amortisation of other intangible assets (Note 14)
Depreciation of property, plant and equipment (Note 15)
Cost of inventories recognised as expense
Operating lease rentals payable
Repairs and maintenance on property, plant and equipment
Redundancy and termination costs
Rental income
Net impairment reversals on trade receivables (Note 18)
Profit on disposal of non-current assets held for sale (Note 19)
Profit on disposal of property, plant and equipment
Research and Development Expenditure Credits ('RDEC')
The following items for research and development activities have been charged/(credited) to operating profit:
Research and development expenditure
Government grant income received in respect of this expenditure
Total
2019
£m
9.8
5.6
70.9
8.5
12.2
2.4
(0.9)
(0.6)
-
(0.7)
(7.1)
2019
£m
5.8
(2.2)
3.6
2018
£m
9.5
6.4
50.4
8.7
12.3
4.0
(0.5)
(0.6)
(1.6)
-
(8.0)
2018
£m
4.4
(1.6)
2.8
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Creating a world fit for the future 139
Notes to the financial statements
6 Auditors’ remuneration
Fees payable for services provided by the Company's auditors and its associates(1)
Statutory audit of the Company and its consolidated financial statements(2)
Statutory audit of the Company's subsidiaries and their financial statements(3)
Total audit fees
Audit-related assurance services(4)
Other non-audit services(5)
Total non-audit fees
KPMG
2019
£m
0.2
0.3
0.5
0.1
-
0.1
PwC
2018
£m
0.3
0.2
0.5
0.1
0.1
0.2
(1) Following legislation requiring a mandatory change of the external auditors of the Group by 17 June 2020, an audit tender process was undertaken and KPMG LLP (‘KPMG’) were appointed as the
Company’s and the Group’s external auditors for the year ended 30 June 2019. This was subsequently approved by shareholders at the AGM on 15 November 2018.
(2) Fees payable during the year to the Company's auditors and its associates for the statutory audit of the Company and its consolidated financial statements were £195,000 (2018: £274,000).
(3) Fees payable during the year to the Company's auditors and its associates for the statutory audit of the Company's subsidiaries and their financial statements were £351,000 (2018: £212,000).
(4) Fees payable during the year to the Company's auditors and its associates for audit-related assurance services were £50,000 (2018: £59,000) and comprised £42,000 (2018: £44,000) pursuant to the interim
review and £8,000 (2018: £15,000) for independent reviews, agreed-upon procedures and other services closely related to the audit of the Company and its subsidiaries.
(5) Fees payable during the year to the Company’s auditors and its associates for other non-audit services were £Nil (2018: £80,000). Prior year fees comprised £75,000 for services in respect of acquisition
and disposal processes, together with £5,000 for other services.
Total non-audit fees payable to the external auditors for audit-related assurance services and other non-audit services for the financial year were 9%
(2018: 29%) of total audit fees. These non-audit fees in the current year comprised the Group’s interim review and other audit-related assurance services. In
the prior year the services provided by PricewaterhouseCoopers LLP (‘PwC’) as the previous auditors comprised fees in respect of due diligence on targets
for acquisition and assistance with disposals of assets. It was considered to be in the interests of the Group to purchase these services from the external
auditors at the time due to their in-depth knowledge of the Group.
7 Employees
Staff costs
Wages and salaries (including redundancy and termination costs)
Social security costs
Pension costs – defined contribution schemes
Share-based payments (Note 29)
Total staff costs
Average monthly number of employees (including Executive Directors)
Technical Consulting
Performance Products
Head Office
Total average number of employees
Key management compensation
Short-term employee benefits
Share-based payments
Post-employment benefits
Termination benefits
Total key management compensation
2019
£m
153.6
15.8
9.5
1.0
179.9
2018
£m
147.3
17.1
9.6
1.0
175.0
2019
Number
2018
Number
2,356
389
55
2,800
2019
£m
4.1
0.5
0.3
-
4.9
2,525
323
48
2,896
2018
£m
4.2
0.8
0.3
0.1
5.4
Key management personnel are the Board of Directors, together with the Managing Directors who have the authority and responsibility for planning,
directing and controlling the Group’s activities and resources within the market sectors in which the Group operates.
The remuneration received by all Executive and Non-Executive Directors during the year is disclosed in the Directors' Remuneration Report on page 91.
140 Ricardo plc Annual Report & Accounts 2018/19
8 Net finance costs
Finance income:
Bank interest receivable
Total finance income
Finance costs:
Bank interest payable on borrowings
Defined benefit pension financing costs (Note 24)
Total finance costs
Net finance costs
9 Taxation
Current income tax:
- UK corporation tax
- Adjustments in respect of prior years
- Total UK tax
- Foreign corporation tax
- Adjustments in respect of prior years
- Total foreign tax
Total current income tax
Deferred tax:
- Charge for the year(2)
- Adjustments in respect of prior years
Total deferred tax
Total taxation
Tax on items recognised in other comprehensive income
Tax on items recognised directly in equity
Notes to the financial statements
2019
£m
0.5
0.5
(3.0)
(0.1)
(3.1)
(2.6)
2019
£m
1.6
(0.8)
0.8
1.7
0.1
1.8
2.6
3.0
1.0
4.0
6.6
1.4
-
2018
£m
0.4
0.4
(2.1)
(0.5)
(2.6)
(2.2)
2018
Restated(1)
£m
3.6
0.2
3.8
2.7
0.5
3.2
7.0
2.8
(0.5)
2.3
9.3
2.7
(0.1)
(1) The prior year has been restated for IFRS 15 Revenue from Contracts with Customers. See Note 38(a) for more details. During the current financial year the £1.3m deferred tax asset that arose on transition
unwound as a deferred tax charge, with a corresponding credit to UK corporation tax.
(2) Included within the Group’s restated deferred tax charge for the prior year of £2.8m, is the derecognition of a net deferred tax asset brought forward of £2.2m, as set out in further detail in Footnote 4
of Note 4.
Tax on items recognised in other comprehensive income relate to the tax impact of remeasurements of the defined benefit pension scheme. Tax on items
recognised directly in equity relate to equity-settled share-based payment transactions.
Changes to the UK corporation tax rates were enacted on 15 September 2016 as part of the Finance Act 2016. These included a reduction to the main
rate from 19% to 17% from 1 April 2020. Deferred taxes at the reporting date have been measured and reflected in these financial statements by using the
enacted rate within each jurisdiction.
The tax charge for the year is higher (2018: higher) than the standard rate of corporation tax in the UK. The differences are set out below:
Profit for the year before tax
Multiplied by the standard rate of corporation tax in the UK of 19% (2018: 19%)
Effects of:
Losses not recognised
Expenses not deductible for tax purposes
Government tax incentives(3)
Other overseas taxes(4)
Adjustments in respect of prior years
Changes in corporation tax rates
Derecognition of deferred taxes
Total taxation
(3) Primarily relates to R&D tax credits.
(4) Primarily relates to withholding taxes.
2019
£m
26.5
5.0
0.1
0.5
(0.2)
0.5
0.3
0.4
-
6.6
2018
Restated(1)
£m
27.0
5.1
0.8
0.7
(0.2)
0.3
0.2
0.2
2.2
9.3
Creating a world fit for the future 141
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Notes to the financial statements
10 Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of shares outstanding
during the year, excluding those held by an employee benefit trust for the Long-Term Incentive Plan ('LTIP') and by the Share Incentive Plan ('SIP') for the free
share scheme which are treated as cancelled for the purposes of the calculation.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary
shares. These include potential awards of LTIP shares and options granted to employees. The assumed proceeds from these is regarded as having been
received at the average market price of ordinary shares during the year.
Reconciliations of the earnings and the weighted average number of shares used in the calculations are set out below. Underlying earnings per share is also
shown because the Directors consider that this provides a more useful indication of underlying performance and trends over time.
Earnings attributable to owners of the parent
Add back the net-of-tax impact of:
- Amortisation of acquired intangible assets
- Acquisition-related expenditure
- Reorganisation costs
- Guaranteed Minimum Pensions ('GMP') equalisation
- Derecognition of net deferred tax assets
Underlying earnings attributable to owners of the parent
Basic weighted average number of shares in issue
Effect of dilutive potential shares
Diluted weighted average number of shares in issue
Earnings per share
Basic
Diluted
Underlying earnings per share
Basic
Diluted
(1) The prior year has been restated for IFRS 15 Revenue from Contracts with Customers. See Note 38(a) for more details.
11 Dividends
Final dividend for the year ended 30 June 2018 of 14.71p (2017: 13.88p) per share
Interim dividend for the year ended 30 June 2019 of 6.00p (2018: 5.75p) per share
Equity dividends paid
2019
£m
19.8
3.4
1.2
3.0
1.3
-
28.7
2018
Restated(1)
£m
17.6
3.5
1.4
4.7
-
2.2
29.4
2019
Number of
shares
millions
2018
Number of
shares
millions
53.4
0.2
53.6
2019
pence
37.1
36.9
2019
pence
53.7
53.5
2019
£m
7.8
3.2
11.0
53.4
0.2
53.6
2018
Restated(1)
pence
33.0
32.8
2018
Restated(1)
pence
55.1
54.9
2018
£m
7.4
3.1
10.5
The Directors are proposing a final dividend in respect of the financial year ended 30 June 2019 of 15.28p per share which will utilise £8.2m of retained
earnings. It will be paid on 21 November 2019 to shareholders who are on the register of members at the close of business on 8 November 2019, subject to
approval at the Annual General Meeting on 14 November 2019.
142 Ricardo plc Annual Report & Accounts 2018/19
Earnings attributable to owners of the parent
Add back the net-of-tax impact of:
- Amortisation of acquired intangible assets
- Acquisition-related expenditure
- Reorganisation costs
- Guaranteed Minimum Pensions ('GMP') equalisation
- Derecognition of net deferred tax assets
Underlying earnings attributable to owners of the parent
Basic weighted average number of shares in issue
Effect of dilutive potential shares
Diluted weighted average number of shares in issue
Earnings per share
Basic
Diluted
Underlying earnings per share
Basic
Diluted
2019
2018
Number of
Number of
shares
millions
shares
millions
2019
£m
19.8
3.4
1.2
3.0
1.3
-
28.7
53.4
0.2
53.6
2019
pence
37.1
36.9
2019
pence
53.7
53.5
2018
Restated(1)
£m
17.6
3.5
1.4
4.7
-
2.2
29.4
53.4
0.2
53.6
2018
Restated(1)
pence
33.0
32.8
2018
Restated(1)
pence
55.1
54.9
Notes to the financial statements
12 Acquisitions
(a) Acquisitions in the current year – Transport Engineering
On 31 May 2019, the Group acquired the entire issued share capital of Transport Engineering Pty Ltd ('Transport Engineering') for initial cash consideration
payable of £21.7m (AUD 39.5m) which includes an adjustment for cash and normalised net working capital of £0.5m (AUD 0.9m) paid post year-end,
together with the accrued provisional fair value of contingent cash consideration payable of £5.1m (AUD 9.4m).
Transport Engineering is a leading rail technical services consultancy based in Australia. It expands upon the Group's existing capabilities within the growing
Asia-Pacific rail market and provides a footprint for other Ricardo businesses in Australia. Transport Engineering was renamed Ricardo Rail Australia on
11 June 2019.
The following tables set out the provisional fair value of cash consideration payable to acquire Transport Engineering, together with the provisional
assessment of the fair value of net assets acquired.
Provisional fair value of cash consideration
Initial cash consideration
Provisional fair value of contingent cash consideration
Total provisional fair value of cash consideration
Provisional assessment of the fair value of identifiable net assets acquired
Customer contracts and relationships (Note 14)
Property, plant and equipment (Note 15)
Trade, contract and other receivables
Cash and cash equivalents
Trade, contract and other payables
Current tax liabilities
Deferred tax liabilities (Note 25(b))
Total provisional assessment of the fair value of identifiable net assets acquired
Goodwill
Total provisional fair value of cash consideration
£m
21.7
5.1
26.8
£m
9.7
0.1
2.3
2.3
(1.7)
(0.9)
(2.9)
8.9
17.9
26.8
The Group has also acquired all of Transport Engineering's shareholding in its associate, Wamarragu Transport Services Pty Ltd, the financial results of which
are immaterial to the Group.
The cash impact of the acquisition in the year was £18.9m (AUD 34.4m), being the initial cash consideration of £21.2m (AUD 38.6m) paid on completion, less
cash acquired of £2.3m (AUD 4.2m).
The maximum contingent cash consideration payable is £8.2m (AUD 15.0m). The amounts payable will be based on the achievement of annual
performance targets measured against the profit before tax of Transport Engineering across a two year earn-out period. Each earn-out is only payable in full
if the performance target is achieved.
Provisional adjustments have been made to identifiable net assets acquired to reflect their fair value. These include the recognition of customer-related
intangible assets separable from goodwill amounting to £9.7m (AUD 17.8m). The provisional fair values of contingent cash consideration and identifiable net
assets acquired may be adjusted in future in accordance with the requirements of IFRS 3 Business Combinations and the sale and purchase agreement.
The provisional assessment of goodwill arising on acquisition can be ascribed to the existence of a skilled, active workforce, developed expertise and
processes and the opportunities to obtain new contracts and develop the business. None of these meet the criteria for recognition as intangible assets
separable from goodwill. None of the goodwill recognised on consolidation is expected to be deductible for tax purposes.
The provisional assessment of the fair value of trade, contract and other receivables acquired of £2.3m (AUD 4.2m) includes trade receivables of £0.3m
(AUD 0.6m) and amounts recoverable on contracts of £1.8m (AUD 3.2m), all of which is expected to be collectible.
Acquisition-related expenditure of £0.5m has been charged to the income statement for the year ended 30 June 2019 and is included as a specific adjusting
item in Note 4.
The revenue included in the income statement in relation to the acquired business was £1.4m. The underlying operating profit over the same period was
£0.3m. This is reported in the Technical Consulting segment in Note 2.
Had Transport Engineering been acquired and consolidated from 1 July 2018, revenue and underlying operating profit in the income statement would be
£14.0m and £3.2m higher, respectively, based on available information for the period from 1 July 2018 to the acquisition date.
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Creating a world fit for the future 143
Notes to the financial statements
12 Acquisitions (continued)
(b) Acquisitions in the prior year – Control Point Corporation
On 8 September 2017, the Group acquired the entire issued share capital of Control Point Corporation (‘CPC’), which was subsequently renamed Ricardo
Defense, Inc., for initial cash consideration of £6.3m (USD 8.3m) and fair value of contingent cash consideration of £1.7m (USD 2.2m), based upon CPC
achieving certain financial performance targets. The acquisition of CPC expanded upon the Group’s vehicle engineering capabilities in the Defence sector
and added expertise in distributed software-based systems and fleet management technologies.
The following tables set out the fair value of cash consideration paid to acquire CPC, together with the fair value of net assets acquired:
Fair value of cash consideration
Initial cash consideration
Fair value of contingent cash consideration
Total fair value of cash consideration
Fair value of identifiable net assets acquired
Customer contracts and relationships (Note 14)
Software and technology (Note 14)
Property, plant and equipment (Note 15)
Trade, contract and other receivables
Cash and cash equivalents
Trade, contract and other payables
Deferred tax liabilities (Note 25(b))
Provisions (Note 26)
Total fair value of identifiable net assets acquired
Goodwill
Total fair value of cash consideration
£m
6.3
1.7
8.0
£m
2.0
0.3
0.1
2.1
1.7
(0.8)
(0.4)
(0.4)
4.6
3.4
8.0
All of the initial cash consideration of £6.3m (USD 8.3m) was paid in the prior year, net of cash acquired of £1.7m (USD 2.2m).
Adjustments were made to identifiable assets and liabilities on acquisition to reflect their fair value. These included the recognition of customer-related
intangible assets amounting to £2.0m (USD 2.6m) and developed software and technology assets of £0.3m (USD 0.4m). The fair value of the contingent cash
consideration and identifiable net assets acquired were identified in accordance with the requirements of IFRS 3 Business Combinations and the sale and
purchase agreement.
The goodwill arising on acquisition can be ascribed to the existence of a skilled, active workforce, developed expertise and processes and the opportunities
to obtain new contracts and develop the business. None of these meet the criteria for recognition as intangible assets separable from goodwill. The
goodwill recognised is deductible for tax purposes.
The fair value of trade, contract and other receivables of £2.1m (USD 2.8m) included net trade receivables of £2.0m (USD 2.6m) and amounts recoverable on
contracts of £0.1m ($0.1m), all of which has been collected.
Acquisition-related expenditure of £0.8m was charged to the income statement for the year ended 30 June 2018 and was included as a specific adjusting
item in Note 4.
The revenue included in the prior year income statement in relation to the acquired business was £10.3m. The underlying operating profit over the same
period was £1.0m. This was reported in the Technical Consulting segment in Note 2.
Had CPC been acquired and consolidated from 1 July 2017, revenue and underlying operating profit in the prior year income statement would have been
£2.2m and £0.2m higher respectively, based on available information for the period from 1 July 2017 to the acquisition date.
144 Ricardo plc Annual Report & Accounts 2018/19
13 Goodwill
Group
At 1 July 2017
Acquisition of business (Note 12(b))
Exchange adjustments
At 30 June 2018
Acquisition of business (Note 12(a))
Exchange adjustments
At 30 June 2019
Notes to the financial statements
£m
62.0
3.4
0.1
65.5
17.9
0.8
84.2
The recoverable amount of each cash-generating unit ('CGU') is calculated by assessing its value in use, which is determined by performing discounted
future pre-tax cash flow calculations for a five-year period and projected into perpetuity. The five-year cash flow forecasts are based on the budget for the
following year (year one), the business plans for years two and three (the three-year plan), and operating profit projections for years four and five, with a 80%
operating cash flow conversion rate.
The three-year plan is prepared by management, and is reviewed and approved by the Board. The three-year plan reflects past experience, management’s
assessment of the current contract portfolio, contract wins, contract retention, price increases, gross margin, as well as future expected market trends.
Operating profit projections for years four and five, and cash flows beyond year five are projected into perpetuity using a long-term growth rate, which
is determined as being the lower of the planned compound annual growth rate in each CGU's three-year plan and external third party forecasts of the
prevailing inflation and economic growth rates for each of the territories in which each CGU primarily operates.
Apart from operating cash flows and long-term growth rates, the other key assumption is the pre-tax discount rate, which is derived from externally sourced
data and reflects the current market assessment of the Group’s time value of money and risks specific to each CGU.
The carrying value of goodwill and key assumptions used in determining the recoverable amount of each CGU are as follows:
Group
Technical Consulting:
Ricardo Rail(1)
Ricardo Automotive Europe
Ricardo Energy & Environment
Ricardo Defense
Technical Consulting total
Performance Products:
Ricardo Performance Products
At 30 June
Carrying value
2019
£m
46.0
20.3
13.3
3.5
83.1
1.1
84.2
2018
£m
27.6
20.1
13.3
3.4
64.4
1.1
65.5
Pre-tax discount rate
2019
%
2018
%
Long-term growth rate
2018
2019
%
%
8.0
8.1
7.1
8.4
7.1
8.1
7.6
7.6
9.2
7.6
4.5
3.2
3.5
3.5
3.5
4.8
4.1
4.1
3.7
4.1
(1) As set out in further detail in Note 12(a), the Group acquired Transport Engineering Pty Ltd ('Transport Engineering') on 31 May 2019, adding goodwill of £17.9m to the Ricardo Rail CGU. This Acquisition
provides an active presence for Ricardo Rail in Australia, a strategically important, sizeable and growing market. Transport Engineering was renamed Ricardo Rail Australia on 11 June 2019 and forms a
core part of the Group's Rail business, adding breadth and depth to Ricardo Rail's existing capabilities.
The three-year plan and discounted cash flow calculations thereon provide a value in use which supports the carrying value of the goodwill allocated to
each CGU at 30 June 2019, resulting in no impairment for the year (2018: £Nil). In considering sensitivities, no reasonable change in any of the above key
assumptions would cause the value in use of the CGUs to fall below the carrying value of the allocated goodwill. The sensitivities assessed include a 10%
reduction in planned operating profit, a 20% reduction in the planned operating cash flow conversion rate, a 1% increase in the pre-tax discount rate and a
1% decrease in the long-term growth rate, together with a further scenario whereby all sensitivities were combined together.
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Creating a world fit for the future 145
Notes to the financial statements
14 Other intangible assets
Group
Cost
At 1 July 2017
Acquisition of business (Note 12(b))
Additions
Assets classified as held for sale (Note 19)
Reclassifications
Exchange rate adjustments
At 30 June 2018
Acquisition of business (Note 12(a))
Additions
Disposals
Exchange rate adjustments
At 30 June 2019
Accumulated amortisation
At 1 July 2017
Charge for the year
Assets classified as held for sale (Note 19)
Reclassifications
Exchange rate adjustments
At 30 June 2018
Charge for the year
Disposals
Exchange rate adjustments
At 30 June 2019
Net book value
At 30 June 2019
At 30 June 2018
At 30 June 2017
Acquired intangible assets
Customer
contracts and
relationships
£m
Software and
technology
£m
Software
£m
Development
costs
£m
25.5
2.0
-
-
-
0.1
27.6
9.7
-
-
0.3
37.6
10.2
3.9
-
-
(0.1)
14.0
3.6
-
0.1
17.7
19.9
13.6
15.3
1.9
0.3
-
-
-
-
2.2
-
-
-
-
2.2
0.8
0.4
-
-
-
1.2
0.4
-
0.1
1.7
0.5
1.0
1.1
24.7
-
1.4
(1.4)
0.2
(0.1)
24.8
-
1.5
(0.5)
0.1
25.9
17.1
2.3
(1.4)
0.1
-
18.1
2.3
(0.5)
0.1
20.0
5.9
6.7
7.6
15.5
-
5.1
-
(0.2)
(0.1)
20.3
-
7.6
(0.2)
0.4
28.1
7.1
2.9
-
(0.1)
-
9.9
3.5
(0.2)
0.2
13.4
14.7
10.4
8.4
Total
£m
67.6
2.3
6.5
(1.4)
-
(0.1)
74.9
9.7
9.1
(0.7)
0.8
93.8
35.2
9.5
(1.4)
-
(0.1)
43.2
9.8
(0.7)
0.5
52.8
41.0
31.7
32.4
Customer contracts and relationships were primarily identified as part of the previous acquisitions of AEA and LR Rail. The assets specific to these
acquisitions have carrying values of £1.5m (2018: £2.6m) and £7.4m (2018: £9.3m) and have remaining amortisation periods of one and four years,
respectively. Customer contracts and relationships were also identified as part of the acquisition in the current year of Transport Engineering (see Note 12(a)),
which has a carrying value of £9.5m and a remaining amortisation period of five years.
Software which is not acquired through business combinations primarily comprises costs that have been capitalised in respect of an internally developed
ERP system. The ERP system has a carrying value of £1.9m (2018: £2.8m) and has a remaining amortisation period of four years. Software includes £0.9m
(2018: £0.9m) in respect of assets under construction which are not being amortised until the assets are made available for use.
Development costs are incurred to develop and regularly update a suite of simulation and analysis software tools used in the Automotive sector, but also
with applications in other sectors. The suite of assets have a carrying value of £5.0m (2018: £3.6m) and an amortisation period of three years is applied to
each annual update when released. Development costs also include a patented system that combines anti-lock braking and electronic stability control
('ABS brake kits') to mitigate rollover fatalities commonly associated with the High Mobility Multipurpose Wheeled Vehicle ('HMMWV' or ‘Humvee’). The
asset has a carrying value of £2.4m (2018: £2.0m).
In addition, development costs include £5.3m (2018: £5.8m) in respect of assets under construction which are not being amortised until the assets are made
available for use or sale. Development costs under construction include assets such as engineering software updates under development, together with
new technology, tools and processes in the Automotive and Energy & Environment businesses.
The amortisation charge of £9.8m (2018: £9.5m) is comprised of £2.4m (2018: £1.8m) included within cost of sales and £7.4m (2018: £7.7m) included within
administrative expenses in the income statement, of which £4.0m (2018: £4.3m) relates to acquired intangible assets and is presented within specific
adjusting items, as set out in Note 4.
146 Ricardo plc Annual Report & Accounts 2018/19
14 Other intangible assets (continued)
Company
Cost
At 1 July 2017 and 30 June 2018
Additions
Disposals
At 30 June 2019
Accumulated amortisation
At 1 July 2017
Charge for the year
At 30 June 2018
Charge for the year
Disposals
At 30 June 2019
Net book value
At 30 June 2019
At 30 June 2018
At 30 June 2017
Notes to the financial statements
Software
£m
8.8
0.3
(0.2)
8.9
6.1
1.1
7.2
1.0
(0.2)
8.0
0.9
1.6
2.7
Software primarily comprises costs that have been capitalised in respect of an internally developed ERP system. The ERP system has a carrying value of
£0.2m (2018: £0.9m) and a remaining amortisation period of one year. Software includes £0.4m (2018: £0.3m) in respect of assets under construction which
are not being amortised until the assets are made available for use.
Group
Cost
At 1 July 2017
Additions
Acquisition of business (Note 12(b))
Assets classified as held for sale (Note 19)
Reclassifications
Exchange rate adjustments
At 30 June 2018
Acquisition of business (Note 12(a))
Assets classified as held for sale (Note 19)
Additions
Disposals
Exchange rate adjustments
At 30 June 2019
Accumulated amortisation
At 1 July 2017
Charge for the year
Reclassifications
Exchange rate adjustments
At 30 June 2018
Charge for the year
Disposals
Exchange rate adjustments
At 30 June 2019
Net book value
At 30 June 2019
At 30 June 2018
At 30 June 2017
Acquired intangible assets
Customer
contracts and
relationships
Software and
technology
Software
£m
Development
costs
£m
£m
25.5
2.0
-
-
-
-
-
0.1
27.6
9.7
0.3
37.6
10.2
3.9
-
-
(0.1)
14.0
3.6
-
0.1
17.7
19.9
13.6
15.3
£m
1.9
0.3
2.2
-
-
-
-
-
-
-
-
-
-
-
2.2
0.8
0.4
1.2
0.4
-
0.1
1.7
0.5
1.0
1.1
24.7
-
1.4
(1.4)
0.2
(0.1)
24.8
-
1.5
(0.5)
0.1
25.9
17.1
2.3
(1.4)
0.1
-
18.1
2.3
(0.5)
0.1
20.0
5.9
6.7
7.6
15.5
5.1
-
-
(0.2)
(0.1)
20.3
-
7.6
(0.2)
0.4
28.1
7.1
2.9
(0.1)
-
-
9.9
3.5
(0.2)
0.2
13.4
14.7
10.4
8.4
Total
£m
67.6
2.3
6.5
(1.4)
-
(0.1)
74.9
9.7
9.1
(0.7)
0.8
93.8
35.2
9.5
(1.4)
-
(0.1)
43.2
9.8
(0.7)
0.5
52.8
41.0
31.7
32.4
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Notes to the financial statements
15 Property, plant and equipment
Group
Cost
At 1 July 2017
Acquisition of business (Note 12(b))
Additions
Disposals
Assets classified as held for sale (Note 19)
Exchange rate adjustments
At 30 June 2018
Acquisition of business (Note 12(a))
Additions
Disposals
Assets classified as held for sale (Note 19)
Reclassifications
Exchange rate adjustments
At 30 June 2019
Accumulated depreciation
At 1 July 2017
Charge for the year
Disposals
Assets classified as held for sale (Note 19)
Exchange rate adjustments
At 30 June 2018
Charge for the year
Disposals
Assets classified as held for sale (Note 19)
Reclassifications
Exchange rate adjustments
At 30 June 2019
Net book value
At 30 June 2019
At 30 June 2018
At 30 June 2017
Freehold
land and
buildings
£m
Leasehold
property
£m
Plant and
machinery
£m
Fixtures,
fittings and
equipment
£m
24.1
-
0.5
(0.3)
(3.8)
-
20.5
-
0.5
-
-
(0.6)
-
20.4
5.4
0.6
(0.1)
(1.5)
0.1
4.5
0.4
-
-
(0.3)
-
4.6
15.8
16.0
18.7
4.0
-
0.6
-
-
(0.1)
4.5
-
0.5
-
-
0.6
0.1
5.7
2.2
0.3
-
-
(0.1)
2.4
0.4
-
-
0.3
-
3.1
2.6
2.1
1.8
109.8
0.1
4.4
(0.5)
(13.8)
(0.7)
99.3
0.1
4.6
(5.0)
(19.5)
0.6
0.6
80.7
87.4
3.4
(0.5)
(12.0)
(0.5)
77.8
2.8
(5.0)
(16.6)
-
0.7
59.7
21.0
21.5
22.4
24.2
-
2.7
(0.5)
(2.7)
-
23.7
-
2.0
(1.9)
-
(0.6)
0.2
23.4
19.1
2.1
(0.5)
(2.6)
(0.1)
18.0
2.0
(1.9)
-
-
0.1
18.2
5.2
5.7
5.1
Total
£m
162.1
0.1
8.2
(1.3)
(20.3)
(0.8)
148.0
0.1
7.6
(6.9)
(19.5)
-
0.9
130.2
114.1
6.4
(1.1)
(16.1)
(0.6)
102.7
5.6
(6.9)
(16.6)
-
0.8
85.6
44.6
45.3
48.0
The carrying value of assets under construction included in property, plant and equipment amounts to £5.0m (2018: £4.4m). Property, plant and equipment
under construction includes a hybrid powertrain rig within plant and machinery with a carrying value of £1.8m (2018: £1.5m). Amortisation is expected to
commence in the next financial year.
At 30 June 2019, the Group had plant and machinery purchased during the year under a finance lease and secured on the asset (see Note 21) with a carrying
value of £0.7m (2018: £Nil).
At 30 June 2019, contracts had been placed for future capital expenditure, which have not been provided for in the financial statements, amounting to
£1.7m (2018: £1.3m).
148 Ricardo plc Annual Report & Accounts 2018/19
15 Property, plant and equipment (continued)
Company
Cost
At 1 July 2017
Additions
At 30 June 2018
Additions
Disposals
Reclassifications
At 30 June 2019
Accumulated depreciation
At 1 July 2017
Charge for the year
At 30 June 2018
Charge for the year
Disposals
At 30 June 2019
Net book value
At 30 June 2019
At 30 June 2018
At 30 June 2017
Notes to the financial statements
Freehold
land and
buildings
£m
Leasehold
property
£m
Fixtures,
fittings and
equipment
£m
5.7
-
5.7
-
-
(0.1)
5.6
2.0
0.1
2.1
0.1
-
2.2
3.4
3.6
3.7
1.1
-
1.1
-
-
-
1.1
0.5
-
0.5
-
-
0.5
0.6
0.6
0.6
1.0
0.1
1.1
0.2
(0.4)
0.1
1.0
0.6
0.2
0.8
0.1
(0.4)
0.5
0.5
0.3
0.4
Total
£m
7.8
0.1
7.9
0.2
(0.4)
-
7.7
3.1
0.3
3.4
0.2
(0.4)
3.2
4.5
4.5
4.7
A contingent liability of up to £2.8m which is associated with a guarantee provided to the Ricardo Group Pension Fund in July 2013 is secured on specific
land and buildings. Further detail is given in Note 35.
16 Investments
Company
At 1 July 2017, 30 June 2018 and 30 June 2019
The Directors consider that the fair value of investments is not less than the carrying value.
Details of the Company’s subsidiaries and related undertakings are shown in Note 37.
17 Inventories
Group
Raw materials and consumables
Work in progress
Finished goods
At 30 June
Inventories of £70.9m (2018: £50.4m) were recognised as an expense during the year and included in cost of sales.
During the year £0.4m (2018: £0.5m) of inventory was written down and also included in cost of sales.
Shares in
subsidiaries
£m
103.1
2019
£m
9.5
3.9
1.1
14.5
2018
£m
8.4
3.9
1.0
13.3
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Creating a world fit for the future 149
Notes to the financial statements
18 Trade, contract and other receivables
Trade receivables
Less provision for impairment of trade receivables(2)
Trade receivables – net
Contract assets:
- Amounts recoverable on contracts ('AROC')
- Accrued revenue
Amounts owed by Group undertakings
Prepayments
Other receivables
At 30 June
Group
2018
Restated(1)
£m
65.5
(1.1)
64.4
46.1
2.3
-
9.1
13.4
135.3
2019
£m
65.3
(2.8)
62.5
54.1
1.4
-
11.0
12.4
141.4
Company
2019
2018
£m
-
-
-
-
-
90.0
0.9
0.9
91.8
£m
-
-
-
-
-
88.5
1.1
-
89.6
(1) The prior year has been restated for IFRS 15 Revenue from Contracts with Customers. See Note 38(a) for more details.
(2) In the prior year, the provision for impairment of trade receivables was measured in accordance with IAS 39 Financial Instruments: Recognition and Measurement. In the current year, the provision for
impairment of trade receivables was measured in accordance with IFRS 9 Financial Instruments, which became effective for the Group from 1 July 2018. Comparative information has not been restated
as a result of the transition method adopted, with the transitional adjustment impacting retained earnings as at 1 July 2018. Please see Note 38(b) for further details.
All trade, contract and other receivables are due within the next 12 months.
Contract assets primarily relate to the Group’s rights to consideration for work completed but not yet invoiced at the reporting date. The carrying amount at
year-end is presented net of a provision for impairment of contract assets of £1.1m (2018: £1.2m). Contract assets have increased in the current year primarily
due to changes in the mix of milestones and invoicing schedules on contracts, together with acquired contract assets (see Note 12(a)). Contract assets are
transferred to trade receivables when an invoice is issued to the customer. Payment terms typically range from immediate payment to 60 days after the
invoice date and standard payment terms are usually 30 days after the invoice date.
The net revenue recognised in the year from wholly or partially satisfied distinct performance obligations in previous years is £25.9m (2018: £28.2m). This is
primarily due to the net impact of variation orders and cancellations for changes in scope and transaction price on contracts.
In respect of the Company, £8.2m (2018: £8.8m) of the amounts owed by Group undertakings are due for repayment within the next 12 months and the
remaining £81.8m (2018: £79.7m) have no fixed repayment date. £70.5m (2018: £67.6m) of the amounts owed by Group undertakings carry interest at rates
between 2.3% and 5.0% (2018: 2.4% and 5.0%) with the remaining £19.5m (2018: £20.9m) being interest-free. All amounts owed by Group undertakings are
unsecured.
Group provision for impairment of trade receivables
At 1 July
Transitional IFRS 9 adjustment to opening retained earnings(2)
Net impairment reversals to the income statement (Note 5)
Amounts utilised
At 30 June
2019
£m
(1.1)
(2.4)
0.6
0.1
(2.8)
2018
£m
(1.8)
-
0.6
0.1
(1.1)
Information about the Group’s exposure of its trade receivables to credit and market risk is included in Notes 23(d) and 23(e).
Order book
Order book comprises the value of all unworked purchase orders and contracts received from customers at the reporting date and provides an indication of
the amount of revenue that has been secured and will be recognised in future accounting periods. Order book represents the transaction price allocated to
wholly and partially unsatisfied distinct performance obligations, as defined by IFRS 15 Revenue from Contracts with Customers. The periods from 30 June in
which the distinct performance obligations are expected to be satisfied are as follows:
Group
Less than 6 months
6 to 12 months
Over 12 months
At 30 June
2019
£m
145.5
66.8
101.5
313.8
2018
£m
138.2
52.6
103.8
294.6
150 Ricardo plc Annual Report & Accounts 2018/19
Notes to the financial statements
19 Non-current assets held for sale
Group
Property, plant and equipment (Note 15)
At 30 June
2019
£m
2.9
2.9
2018
£m
-
-
In January 2019, the Directors made a decision to commence a process to actively market the test cell assets at the Group’s Detroit Technical Center for sale,
which had a net book value of £2.9m (USD 3.7m). The assets are part of the Technical Consulting segment.
In order to reduce the Group’s fixed cost base and improve efficiency of international test operations, the Group sold its test assets situated at its Chicago
Technical Center and Schechingen Technical Centre during the previous financial year. The profits on disposal of these assets held for sale in the prior year
are set out below:
Chicago Technical Center disposal
Cash consideration
Carrying value of property, plant and equipment (Note 15):
- Leasehold property
- Plant and machinery
Exchange rate adjustments
Profit on disposal before tax
£m
4.1
(0.2)
(2.6)
0.1
1.4
On 2 April 2018, the Group completed the sale of its test assets situated at its Chicago Technical Center for £4.1m (USD 5.5m) to Power Solutions
International, a US manufacturer of engines and power systems. The proceeds were received in the prior year. The profit on disposal was included within
specific adjusting items in the prior year, as set out in Footnote 2 of Note 4.
Schechingen Technical Center disposal
Cash consideration
Carrying value of other intangible assets (Note 14):
- Software
Carrying value of property, plant and equipment (Note 15):
- Freehold land and buildings
- Plant and machinery
- Fixtures, fittings and equipment
Profit on disposal before tax
£m
4.4
-
(2.3)
(1.8)
(0.1)
0.2
On 30 June 2018, the Group completed the sale of its test assets and its Schechingen Technical Centre for £4.4m (EUR 5.0m) to a subsidiary of IAVF
Antriebstechnik GmbH, a German developer and test operator of engines. The first tranche of sales proceeds of £1.9m (EUR 2.2m) was received at the end
of the prior year and the remaining £2.5m (EUR 2.8m) was received at the beginning of the current year. The profit on disposal was included within specific
adjusting items in the prior year, as set out in Footnote 2 of Note 4.
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Creating a world fit for the future 151
Notes to the financial statements
20 Trade, contract and other payables
Trade payables
Contract liabilities:
- Payments received in advance on contracts ('POA')
- Deferred revenue
Tax and social security payable
Amounts owed to Group undertakings
Accruals
Other payables
At 30 June
Current
Non-current
At 30 June
Group
2018
Restated(1)
£m
15.0
25.8
6.8
7.5
-
23.2
4.7
83.0
83.0
-
83.0
2019
£m
21.3
24.5
6.2
7.7
-
27.2
3.0
89.9
84.8
5.1
89.9
Company
2019
2018
£m
0.4
-
-
0.3
71.1
3.0
1.2
76.0
76.0
-
76.0
£m
0.6
-
-
0.1
64.4
4.0
1.2
70.3
70.3
-
70.3
(1) The prior year has been restated for IFRS 15 Revenue from Contracts with Customers. See Note 38(a) for more details.
Revenue recognised in the year from contract liabilities at the beginning of the year was £24.9m (2018: £23.4m).
Contract liabilities primarily relate to the Group’s obligation to perform services, which are paid by customers in advance of those services being provided.
Contract liabilities have decreased due to changes in the mix of contracts containing upfront payment terms.
Non-current amounts include accruals for the provisional fair value of contingent cash consideration payable for Transport Engineering of £5.1m (AUD 9.4m),
as set out in Note 12(a).
In respect of the Company, £6.7m (2018: £8.1m) of the amounts owed to Group undertakings are due for repayment within the next 12 months and the
remaining £64.4m (2018: £56.3m) has no fixed repayment date. £64.4m (2018: £51.3m) of the amounts owed to Group undertakings carry interest at rates
between 2.4% and 2.5% (2018: 2.4% and 3.1%) with the remaining £6.7m (2018: £13.1m) being interest-free. All amounts owed to Group undertakings are
unsecured.
21 Borrowings
Current borrowings:
- Bank overdrafts
- Other loans
- Finance lease liabilities
Total current borrowings
Non-current borrowings:
- Finance lease liabilities
- Bank loans
Total non-current borrowings
At 30 June
Group
Company
2019
£m
3.9
-
0.1
4.0
0.6
79.1
79.7
83.7
2018
£m
9.3
0.1
-
9.4
-
49.8
49.8
59.2
2019
£m
0.1
-
-
0.1
-
14.1
14.1
14.2
2018
£m
8.5
0.1
-
8.6
-
6.8
6.8
15.4
The Group purchased plant and machinery on finance lease during the year (see Note 15). At the year-end, the Group had current finance lease liabilities of
£0.1m and non-current finance lease liabilities of £0.6m. This finance lease has an implicit rate of interest of 2.4%. The future undiscounted minimum lease
payments due within one year is £0.1m and due after one year is £0.7m.
The Group completed a refinance of its banking facilities during the year. At the year-end, the Group held total banking facilities of £166.4m (2018: £90.9m),
which included committed facilities of £150.0m (2018: £75.0m). The committed facility consists of a £150m multi-currency Revolving Credit Facility (‘RCF’)
which provides the Group with committed funding through to July 2023. In addition, the Group has uncommitted facilities including overdrafts of £16.4m
(2018: £15.9m), which mature throughout this and the next financial year and are renewable annually.
Non-current bank loans comprise committed facilities of £79.1m (2018: £49.8m), net of direct issue costs, which were drawn primarily to fund acquisitions and
general corporate purposes. These are denominated in Pounds Sterling and have variable rates of interest dependent upon the Group’s adjusted leverage,
which range from 1.4% to 2.2% (2018: 1.6% to 2.6%) above LIBOR.
Adjusted leverage is defined as being the ratio of total net debt to adjusted EBITDA. Adjusted EBITDA is defined as being operating profit before interest, tax,
depreciation and amortisation, adjusted for any one-off, non-recurring, exceptional or extraordinary costs and acquisitions or disposals during the relevant
period. At the reporting date, the Group has an adjusted leverage which attracts the lowest rate of interest, being LIBOR plus 1.4% (2018: LIBOR plus 1.6%).
The Group has banking facilities for its UK companies which together have a net overdraft limit, but the balances are presented on a gross basis in the financial
statements. Bank balances are presented as cash and cash equivalents, whereas bank overdrafts are presented as borrowings within current liabilities.
152 Ricardo plc Annual Report & Accounts 2018/19
Notes to the financial statements
22 Fair value of financial assets and liabilities
There are no differences between the fair value of financial assets and liabilities and their carrying value. The Group and the Company holds the following
financial instruments:
Group
Company
Financial assets
Amortised cost:
- Trade receivables – net (Note 18)
- Amounts owed by Group undertakings (Note 18)
- Other receivables (Note 18)
- Cash and cash equivalents (Note 33)
Fair value through other comprehensive income ('FVOCI'):
- Fair value hedging instruments
Fair value through profit or loss ('FVTPL'):
- Derivative financial assets
At 30 June
Financial liabilities
Amortised cost:
- Borrowings (Note 21)
- Trade payables (Note 20)
- Amounts owed to Group undertakings (Note 20)
- Other payables (Note 20)
Fair value through other comprehensive income ('FVOCI'):
- Fair value hedging instruments
Fair value through profit or loss ('FVTPL'):
- Derivative financial liabilities
At 30 June
2019
£m
62.5
-
12.4
36.3
0.3
-
111.5
83.7
21.3
-
3.0
1.1
0.1
109.2
2018
£m
64.4
-
13.4
33.1
-
0.1
111.0
59.2
15.0
-
4.7
-
1.0
79.9
2019
£m
-
90.0
0.9
1.7
0.3
-
92.9
14.2
0.4
71.1
1.2
1.1
0.1
88.1
2018
£m
-
88.5
-
0.3
-
0.1
88.9
15.4
0.6
64.4
1.2
-
1.0
82.6
For both the Group and Company, net derivative financial liabilities of £0.9m (2018: £0.9m) relate to foreign exchange contracts.
Summary of methods and assumptions
Short-term borrowings and deposits:
The fair value of short-term deposits, loans and overdrafts approximates to the carrying amount because of the short maturity of these instruments.
Long-term borrowings:
The fair value of borrowings approximates to the carrying amount as they are primarily floating rate loans where payments are reset to market rates at
regular intervals.
Derivatives:
Derivative financial instruments are initially recognised and measured at fair value on the date a derivative contract is entered into and subsequently
measured at fair value on the reporting date. Fair value is estimated by discounting expected future contractual cash flows using prevailing interest rate
curves. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the reporting date (Level 2 of the fair value hierarchy
within IFRS 13 Fair Value Measurement). See Notes 1(u) and 23(g) for further details.
During the year the following foreign exchange differences were credited/(charged) in respect of the Group’s derivative financial instruments:
Measured at FVTPL
Foreign exchange swap contract assets traded pre-transition to IFRS 9:
- Fair value losses
- Fair value gains
Foreign exchange swap contract liabilities traded pre-transition to IFRS 9:
- Fair value losses
Foreign exchange forward contract liabilities:
- Fair value losses
At 30 June
Measured at FVOCI
Foreign exchange swap contract assets:
- Fair value losses
- Fair value gains
Foreign exchange swap contract liabilities:
- Fair value losses
- Fair value gains
At 30 June
2019
£m
-
0.9
-
(0.1)
0.8
(1.1)
1.1
(0.2)
0.3
0.1
2018
£m
(0.9)
0.7
(0.8)
(0.1)
(1.1)
-
-
-
-
-
Creating a world fit for the future 153
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Notes to the financial statements
23 Financial risks
(a) Objectives, policies and strategies
The financial risks faced by the Group and the Company comprise capital risk, liquidity risk, credit risk and market risk (comprising interest rate risk and
foreign exchange risk). The Board reviews and agrees policies for managing each of these risks. The Group and the Company have no material exposure to
commodity price fluctuations and this situation is not expected to change in the foreseeable future.
The financial instruments of the Group and the Company comprise floating rate borrowings, the main purpose of which is to raise finance for the Group's
operations, and foreign exchange contracts used to manage currency risks.
(b) Capital risk
The objectives when managing capital are to safeguard the ability to continue as a going concern in order to provide returns for shareholders, benefits for
other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
Capital is monitored on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as borrowings less
cash and cash equivalents. Total capital is calculated as equity, plus net debt.
Gearing ratio
Net debt (Note 33)
Total equity
Total capital
At 30 June
Group
2018
Restated(1)
£m
26.1
170.8
196.9
13.3%
2019
£m
47.4
171.9
219.3
21.6%
Company
2019
2018
£m
12.5
102.6
115.1
10.9%
£m
15.1
109.2
124.3
12.1%
(1) The prior year has been restated for IFRS 15 Revenue from Contracts with Customers. See Note 38(a) for more details.
(c) Liquidity risk
The Group's policy towards managing its liquidity risks is to maintain a mix of short- and medium-term borrowing facilities. Short-term flexibility is provided
by bank overdraft facilities. In addition, the Group maintains medium-term borrowing facilities in order to provide the appropriate level of finance to
support current and future working capital requirements. As the cash profile on large contracts can vary significantly, the Group seeks committed facilities
that provide sufficient headroom against forecast requirements to mitigate its exposure. Further detail on the Group's facilities is given in Note 21.
The tables below analyse the Group's external non-derivative financial liabilities into relevant maturity groupings, based on the remaining period at the
reporting date to the contractual maturity date. All amounts disclosed in the tables below are the contractual undiscounted cash flows. These amounts
approximate to their carrying amount as the impact of discounting on trade payables that mature after more than one year is insignificant and borrowings
that mature after more than one year are primarily floating rate bank loans where payments are reset to market rates at regular short-term intervals.
Not included within the tables below are the following financial liabilities:
• Derivative financial liabilities as their contractual maturities are not considered to be essential for an understanding of the timing of the cash flows;
• Other payables as the phasing of these liabilities is not contractually defined; and
• Amounts owed to Group undertakings by the Company as the maturity of these liabilities is provided in Note 20.
Maturity of trade payables
Within 1 month
After 1 month and within 3 months
After 3 months and within 12 months
At 30 June
Maturity of borrowings
Overdrafts repayable on demand
Within 12 months:
- Other loans
- Finance lease liabilities
After 12 months and within 5 years:
- Finance lease liabilities
- Bank loans
At 30 June
154 Ricardo plc Annual Report & Accounts 2018/19
Group
Company
Group
2019
£m
12.7
8.2
0.4
21.3
2019
£m
3.9
-
0.1
0.6
79.1
83.7
2018
£m
12.2
2.7
0.1
15.0
2018
£m
9.3
0.1
-
-
49.8
59.2
2019
£m
0.4
-
-
0.4
Company
2019
£m
0.1
-
-
-
14.1
14.2
2018
£m
0.6
-
-
0.6
2018
£m
8.5
0.1
-
-
6.8
15.4
Notes to the financial statements
23 Financial risks (continued)
(d) Credit risk
The Group is exposed to credit risk in respect of its trade receivables, which are stated net of provision for impairment. Exposure to this risk is mitigated by
careful evaluation of the granting of credit and the use of credit insurance where practicable.
Concentrations of credit risk with respect to trade receivables are limited due to the Group's customer base being large and unrelated.
Ageing of Group net trade receivables(2)
Not overdue and not impaired
Overdue but not impaired:
Less than 90 days overdue
91 to 180 days overdue
Over 180 days overdue
At 30 June
2019
£m
50.5
10.5
0.8
0.7
62.5
2018
£m
51.9
8.9
2.0
1.6
64.4
The Group's customers include the world's major transportation original equipment manufacturers, tier 1 suppliers, energy companies and government
agencies. Revenue by customer location is disclosed within Note 3(b) and trade receivables are derived from these customer groups and locations.
We have limited experience of bad debts with any of these customers. Of the total net trade receivables balance as at 30 June 2019 of £62.5m (2018: £64.4m).
£36.6m was received in July 2019 (2018: £30.2m).
An analysis of net trade receivables by currency is as follows:
Group net trade receivables by currency(2)
Pounds Sterling
Euros
US Dollars
Chinese Renminbi
Other currencies
At 30 June
The geographic analysis of the location of gross trade receivables across the Group is as follows:
Neither past due nor impaired(2)
United Kingdom
Mainland Europe
North America
Asia
Rest of the World
At 30 June
Not past due but impaired(2)
United Kingdom
Mainland Europe
North America
Asia
Rest of the World
At 30 June
Overdue but not impaired(2)
United Kingdom
Mainland Europe
North America
Asia
Rest of the World
At 30 June
2019
£m
31.1
8.7
12.9
5.8
4.0
62.5
2019
£m
-
-
-
-
-
-
2019
£m
31.3
3.4
9.6
5.4
1.4
51.1
2019
£m
-
-
-
-
-
-
2018
£m
34.2
8.5
7.9
7.7
6.1
64.4
2018
£m
34.2
3.3
4.8
6.4
2.0
50.7
2018
£m
1.2
-
-
-
-
1.2
2018
£m
4.1
0.9
2.1
3.8
0.5
11.4
(2) The provision for impairment for the current year is presented in accordance with IFRS 9 Financial Instruments, under which all trade receivables in the current year are impaired to some extent, as set
out in more detail in Note 1(u). In the prior year, under IAS 39 Financial Instruments: Recognition and Measurement the individually impaired trade receivables primarily related to customers where there
was evidence of impairment and it was assessed that a portion of these trade receivables were expected to be recovered. Trade receivables that were overdue but not impaired related to customers
for whom there was no recent history of default.
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Notes to the financial statements
23 Financial risks (continued)
(d) Credit risk (continued)
Overdue and impaired(2)
United Kingdom
Mainland Europe
North America
Asia
Rest of the World
At 30 June
The ageing analysis of overdue gross trade receivables across the Group is as follows:
Overdue but not impaired(2)
Less than 90 days overdue
91 to 180 days overdue
Over 180 days overdue
At 30 June
Overdue and impaired(2)
2019
£m
5.8
1.2
3.9
2.7
0.6
14.2
2019
£m
-
-
-
-
2019
£m
2018
£m
0.6
0.1
1.4
0.1
-
2.2
2018
£m
8.9
2.0
0.5
11.4
2018
£m
Less than 90 days overdue
91 to 180 days overdue
Over 180 days overdue
At 30 June
(2) The provision for impairment for the current year is presented in accordance with IFRS 9 Financial Instruments, under which all trade receivables in the current year are impaired to some extent, as set
out in more detail in Note 1(u). In the prior year, under IAS 39 Financial Instruments: Recognition and Measurement the individually impaired trade receivables primarily related to customers where there
was evidence of impairment and it was assessed that a portion of these trade receivables were expected to be recovered. Trade receivables that were overdue but not impaired related to customers
for whom there was no recent history of default.
10.9
0.9
2.4
14.2
-
-
2.2
2.2
The Group and Company is exposed to bank credit risk in respect of money held on deposit and certain derivative transactions entered into with banks.
Exposure to this form of risk is mitigated as material transactions are only undertaken with bank counterparties that have high credit ratings assigned by
international credit-rating agencies. The Group and Company further limits risk in this area by setting an overall credit limit for all transactions with each
bank counterparty in accordance with the institution's credit standing.
Group
Company
Maximum exposure to bank counterparty risk
Cash and cash equivalents
Derivative financial assets
At 30 June
Analysis of Group cash and cash equivalents by geographic location
United Kingdom
Mainland Europe
North America
Asia
Australia
Rest of the World
At 30 June
2019
£m
36.3
0.3
36.6
2018
£m
33.1
0.1
33.2
2019
£m
1.7
0.3
2.0
2019
£m
10.5
4.3
3.4
13.2
3.4
1.5
36.3
2018
£m
0.3
0.1
0.4
2018
£m
8.0
4.0
1.7
17.7
-
1.7
33.1
156 Ricardo plc Annual Report & Accounts 2018/19
Notes to the financial statements
23 Financial risks (continued)
(e) Market risk
Interest rate risk
The Group’s and Company’s borrowings and cash balances held at floating interest rates are exposed to cash flow interest rate risk. As set out in further
detail in Note 21, the exposure to interest rate movements is not currently hedged as the variable rates of interest are largely dependent upon the adjusted
leverage of the Group, which is currently attracting the lowest possible rate of interest. The effect of any foreseen changes in the LIBOR remain unhedged,
although the policy is reviewed on an ongoing basis.
Financial assets and liabilities by interest type
Financial assets:
- Fixed rate
- Floating rate
- Interest-free
Financial liabilities:
- Fixed rate
- Floating rate
- Interest-free
Net financial assets at 30 June
Foreign exchange risk
Group
Company
2019
£m
-
19.6
91.9
(0.7)
(83.0)
(25.5)
2.3
2018
£m
-
28.4
82.6
-
(59.1)
(20.8)
31.1
2019
£m
70.5
-
22.4
(64.4)
(14.2)
(9.5)
4.8
2018
£m
67.6
-
21.3
(51.3)
(15.3)
(16.0)
6.3
The Group faces currency exposures on trading transactions undertaken by its subsidiaries in foreign currencies and balances arising there from, and on the
translation of profits earned in, and net assets of, overseas subsidiaries primarily in the US, Europe and China.
The carrying amounts of the Group's foreign currency denominated monetary assets and liabilities are:
Assets
Liabilities
US Dollar
Euro
Chinese Renminbi
2019
£m
19.5
15.1
15.1
2018
£m
10.7
15.6
22.3
The following foreign exchange differences were (charged)/credited to the income statement for the Group:
Group
Derivative contracts measured at FVTPL (Note 22):
- Foreign exchange contract assets
- Foreign exchange contract liabilities
Other financial assets
Other financial liabilities
At 30 June
2019
£m
(2.5)
(6.8)
(0.4)
2019
£m
0.9
(0.1)
(1.0)
0.1
(0.1)
2018
£m
(2.4)
(6.6)
(0.3)
2018
£m
(0.2)
(0.9)
0.9
1.3
1.1
It is the Group's policy not to undertake any speculative currency transactions.
The Group and Company use derivative financial instruments primarily to manage currency risk on its US Dollar, Euro, Chinese Renminbi, Japanese Yen
and Hong Kong Dollar denominated receivables from its subsidiaries, in addition to managing transactional exposures relating to customer contracts
denominated in foreign currencies.
(f) Sensitivity analysis of financial instruments to market risk
Exchange rate sensitivity
The Group and the Company has financial assets and liabilities denominated in foreign currencies, principally in US Dollars, Euros and Chinese Renminbi,
which are not in the functional currency of the entity that holds them. A 20% change in the value of the US Dollar, Euro or Chinese Renminbi would have
an immaterial impact on the value of these financial instruments at the year-end. Given the relative strengthening of the Company's and the Group's
principal foreign currencies against the Pound Sterling since the UK referendum vote to leave the EU, a 20% sensitivity in these exchange rates is deemed
to be appropriate.
Interest rate sensitivity
A 1% increase in interest rates would have an insignificant impact on the value of the Group's and the Company's floating rate financial instruments at the
year-end. A 1% sensitivity is deemed to be appropriate as loans are based on LIBOR and so are unlikely to be subjected to significant fluctuations in interest
rates in the foreseeable future.
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Notes to the financial statements
23 Financial risks (continued)
(g) Cash flow derivatives
As set out in Notes 1(u) and 23(e), the Group employs derivative financial instruments, including foreign exchange contracts, to mitigate currency
exposures on trading transactions that could affect the income statement. Any change in the fair value of derivative foreign exchange forward and
option contracts are recognised in the income statement. Changes in the fair value of effective derivative foreign exchange swap contracts are hedge
accounted and recognised in other comprehensive income, with any ineffective amount recognised in the income statement.
Though the Group did not hedge account up to 30 June 2018, derivative financial instruments held up to this date were used to manage foreign
exchange exposures. The net change in the fair value of derivative financial instruments was recognised in retained earnings through the income
statement up to 30 June 2018.
IFRS 9 Financial Instruments became effective for the Group from 1 July 2018. The Group's foreign exchange swap contracts entered into on or after
1 July 2018 qualified for hedge accounting as cash flow hedges under IFRS 9. The Group’s risk management strategies and hedge documentation are
aligned with the requirements of IFRS 9 and these relationships are therefore treated as continuing hedges.
Cash flows expected to occur from derivative financial instruments used by the Group for hedging purposes are set out below, which will be largely offset
by cash flows expected to occur from hedged items:
Affecting the income statement
Within 3 months
After 3 months and within 12 months
After 12 months and within 3 years
Total
Affecting other comprehensive income
Within 3 months
After 3 months and within 12 months
Total
24 Defined benefit obligation
Group and Company
2019
£m
0.9
1.3
-
2.2
2019
£m
42.0
11.2
53.2
2018
£m
54.3
2.3
2.2
58.8
2018
£m
-
-
-
The Group operates a defined benefit pension scheme, the Ricardo Group Pension Fund ('RGPF'), which closed to future accrual on 28 February 2010.
Responsibility for the governance of the RGPF lies with the Board of Trustees. The Board of Trustees must be comprised of representatives of the Group and
RGPF participants in accordance with the RGPF's regulations.
The last triennial valuation of the RGPF was completed with an effective date of 5 April 2017 and was approved on 24 September 2018. At the effective
date, the assets of the RGPF had a market value of £134.0m and were sufficient to cover 86% of the benefits that had accrued to members when assessed
on the Trustees' prudent funding basis. Annual contributions due to the RGPF during the year ending 30 June 2020 will be £4.6m and the Company has
agreed with the Trustees that this will continue until 31 July 2022, in order to eliminate the Trustees' funding deficit revealed at the 5 April 2017 valuation. The
next triennial valuation will be on 5 April 2020, and this process is expected to complete in the year ending 30 June 2021. The results of the 2020 triennial
valuation will determine whether the Group's current contribution commitment remains appropriate.
The IAS 19 Employee Benefits valuation was completed as at 30 June 2019. The pension costs relating to the RGPF were assessed using the projected unit
credit method, in accordance with the advice of Mercer, qualified actuaries.
From June 2016, the Company and Trustees decided to introduce a ‘retirement flexibility’ option to the RGPF, which allows members to transfer out their
benefits at retirement. The Company continues to make no allowance within the defined benefit obligation as at 30 June 2019 for members who may elect
to transfer out their benefits at retirement. This assumption will be reviewed on an ongoing basis and may change in future as experience emerges as to the
level of members who elect to transfer out their benefits at retirement.
In addition to the above ongoing option, the Company undertook a transfer value exercise and a pension increase exchange exercise in the year ended
30 June 2019. Four members requested transfer values as part of the transfer value exercise. Several more members proceeded with the pension increase
exchange exercise. As a result, a number of members elected to exchange a portion of their pension for a higher flat annual pension. These members would
otherwise have been entitled to a pension accrued prior to 6 April 1997 (in excess of Guaranteed Minimum Pensions (‘GMP’)) that would have increased in
line with Retail Price Index (‘RPI’) inflation at a rate of no less than 3% but capped at 5%. The impact of the transfer value exercise has been allowed for as a
settlement and the impact of the pension increase exercise has been allowed for as a plan amendment.
The post-retirement mortality assumptions for the current year have been reviewed and use morality tables known as the SAPS 'Series 2' tables, with an
83% multiplier for males applicable to the ‘standard’ version of the table (2018: 85% multiplier for males applied to the ‘light’ version of the table), and a 91%
(2018: 93%) multiplier for females applicable to the 'standard' version of the table. The future improvements component has been updated to be in line with
the Continuous Mortality Investigation ('CMI') 2018 projection model (2018: CMI 2017) with an 'S-kappa' smoothing parameter of 7.5. The latest available CMI
model will be used at each year-end to provide the most accurate representation of the defined benefit obligation. The use of a 1.25% long-term trend is
consistent with the prior year.
158 Ricardo plc Annual Report & Accounts 2018/19
Notes to the financial statements
24 Defined benefit obligation (continued)
Under these principal mortality assumptions the expected future life expectancy from age 65 is as follows:
2019
Males
Females
23.2
24.6
24.4
25.9
Age
65 now
65 in 20 years
Other principal assumptions made were as follows:
Discount rate
RPI inflation rate
Other assumptions made include the following:
Rate of increase in pensions in payment accrued:
- Pre 1 July 2002
- Post 1 July 2002
Rate of increase in deferred pension revaluation
Percentage of pension to be commuted for a lump sum at retirement
Scheme assets are comprised as follows:
Equities
Debt
Cash and other
Property
Investment funds
At 30 June
Quoted
£m
33.1
74.1
-
-
21.8
129.0
2019
Unquoted
£m
-
-
0.6
7.9
-
8.5
Total
£m
33.1
74.1
0.6
7.9
21.8
137.5
Quoted
£m
34.4
66.8
-
-
21.1
122.3
Movements in the fair value of scheme assets and present value of the defined benefit obligation were as follows:
2018
Females
24.4
25.9
2018
%
2.85
3.10
2018
%
3.60
2.95
2.10
25.00
Total
£m
34.4
66.8
1.0
7.7
21.1
131.0
Males
24.3
25.6
2019
%
2.25
3.25
2019
%
3.60
3.05
2.25
15.00
2018
Unquoted
£m
-
-
1.0
7.7
-
8.7
2018
At 1 July
Past service costs(1)
Gains on settlements
Finance income/(costs)
Total credit/(charge) to the income statement
Return on plan assets excluding finance income
Loss from change in demographic assumptions
(Loss)/gain from change in financial assumptions
Experience gains
Total remeasurements in other comprehensive income
Contributions from sponsoring companies
Settlement payments from plan assets
Benefit payments from plan assets
Total cash flows
Total movements
At 30 June
Fair value of
plan assets
£m
2019
Present value
of obligation
£m
131.0
-
-
3.7
3.7
7.9
-
-
-
7.9
4.3
(3.1)
(6.3)
(5.1)
6.5
137.5
(135.6)
(0.5)
0.3
(3.8)
(4.0)
-
(0.1)
(15.7)
-
(15.8)
-
3.1
6.3
9.4
(10.4)
(146.0)
Net total
£m
Fair value of
plan assets
£m
Present value
of obligation
£m
Net total
£m
(4.6)
(0.5)
0.3
(0.1)
(0.3)
7.9
(0.1)
(15.7)
-
(7.9)
4.3
-
-
4.3
(3.9)
(8.5)
131.0
-
-
3.4
3.4
2.1
-
-
-
2.1
4.3
-
(9.8)
(5.5)
-
131.0
(153.2)
-
-
(3.9)
(3.9)
-
(3.0)
7.7
7.0
11.7
-
-
9.8
9.8
17.6
(135.6)
(22.2)
-
-
(0.5)
(0.5)
2.1
(3.0)
7.7
7.0
13.8
4.3
-
-
4.3
17.6
(4.6)
(1) Past service costs comprised £1.3m cost of Guaranteed Minimum Pensions ('GMP') equalisation as described in Footnote 3 of Note 4, offset by a £0.8m credit from plan amendments, as described
on page 158.
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Notes to the financial statements
24 Defined benefit obligation (continued)
Sensitivity of the defined benefit obligation to changes in principal assumptions:
Discount rate
Inflation rate
Post-retirement mortality assumptions
Change in
assumption
-0.25%
+0.25%
-1 year
Impact on present
value of obligation
Increase by £6.9m
Increase by £3.8m
Increase by £7.8m
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice this is unlikely to occur
and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial
assumptions, the same method has been applied as when calculating the pension liability recognised within non-current liabilities. The methods and types
of assumptions used in preparing the sensitivity analysis did not change when compared to the previous year.
Exposure to significant risks from the RGPF are as follows:
Risks
Asset volatility
Impact
The RGPF liabilities are calculated using a discount rate set with reference to corporate bond yields. If the RGPF assets
underperform this yield, the deficit will increase. The RGPF holds a significant proportion of equities and diversified
growth funds, which are expected to outperform corporate bonds in the long-term while providing volatility and risk in
the short-term. The Directors are of the view that due to the long-term nature of the RGPF liabilities and the strength of
the supporting Group, this is an appropriate strategy to manage the RGPF efficiently.
Corporate bond yields
A decrease in corporate bond yields will increase RGPF liabilities, although this will be partially offset by an increase in the
value of the RGPF's bond holdings. The UK referendum vote to leave the EU has caused volatility in the market, which
may continue to adversely affect corporate bond yields, with a corresponding impact on discount rates as described
above.
Inflation
Although there are some caps in place to protect the RGPF against extreme inflation, increases in the level of inflation
will lead to higher liabilities.
Post-retirement mortality
assumptions
The RGPF provides benefits for the life of the members, therefore increases in post-retirement mortality assumptions will
result in an increase in the RGPF's liabilities.
The weighted average duration of the defined benefit obligation is 17.5 (2018: 16.9) years.
Expected maturity analysis of undiscounted pension benefits
Less than 1 year
Between 1 and 2 years
Between 2 and 5 years
Beyond 5 years
Amounts charged/(credited) to the income statement in respect of the defined benefit obligation
Past service costs for:
- GMP equalisation (Note 4)
- Plan amendments
Gains on settlements
Net financing costs (Note 8)
Total
2019
£m
4.3
4.4
14.2
26.7
2019
£m
1.3
(0.8)
(0.3)
0.1
0.3
2018
£m
4.1
4.2
13.5
25.5
2018
£m
-
-
-
0.5
0.5
160 Ricardo plc Annual Report & Accounts 2018/19
Notes to the financial statements
25 Deferred tax
(a) Analysis of net deferred tax
Non-current
Assets
Liabilities
At 30 June
Group
2019
£m
6.7
(7.3)
(0.6)
2018
Restated(1)
£m
8.9
(3.9)
5.0
(1) The prior year has been restated for IFRS 15 Revenue from Contracts with Customers. See Note 38(a) for more details.
(b) Movements in net deferred tax by category
Group
At 30 June 2017 (previously reported)
Adjustment on retrospective application of IFRS 15(2)
At 1 July 2017 (restated)
Arising on acquisition (Note 12(b))
Credited/(charged) to the income statement (restated)(2)
Charged to other comprehensive income
Credited directly to equity
At 30 June 2018 (restated)
Adjustment on initial application of IFRS 9(2)
At 1 July 2018 (adjusted)
Arising on acquisition (Note 12(a))
Charged to the income statement(3)
Credited to other comprehensive income
Exchange rate adjustments
At 30 June 2019
Accelerated
capital
allowances
£m
Defined
benefit
obligation
£m
Tax
losses and
credits
£m
Unrealised
capital
gains
£m
(4.6)
-
(4.6)
-
1.1
-
-
(3.5)
-
(3.5)
-
(1.3)
-
-
(4.8)
4.1
-
4.1
-
(0.7)
(2.7)
-
0.7
-
0.7
-
(0.7)
1.4
-
1.4
9.3
-
9.3
-
(3.5)
-
-
5.8
-
5.8
-
(0.1)
-
(0.1)
5.6
(0.4)
-
(0.4)
-
-
-
-
(0.4)
-
(0.4)
-
-
-
-
(0.4)
Company
2019
2018
£m
2.1
(0.5)
1.6
Other
£m
0.9
1.0
1.9
(0.4)
0.8
-
0.1
2.4
(0.3)
2.1
(2.9)
(1.9)
-
0.3
(2.4)
£m
1.7
(0.6)
1.1
Total
£m
9.3
1.0
10.3
(0.4)
(2.3)
(2.7)
0.1
5.0
(0.3)
4.7
(2.9)
(4.0)
1.4
0.2
(0.6)
(2) See Note 38(a) for details of the restatements arising from the retrospective application of IFRS 15 Revenue from Contracts with Customers and Note 38(b) for details of the adjustments arising from the
initial application of IFRS 9 Financial Instruments. The Group has applied IFRS 15 and IFRS 9 as at 1 July 2018. Under the respective transition methods chosen, comparative information is restated for
IFRS 15 as at 1 July 2017, but not for IFRS 9.
(3) A £1.3m deferred tax asset that arose on transition to IFRS 15 as at 1 July 2018 (see Note 38(a)) is presented within the ‘other’ category above. During the year this unwound as a deferred tax charge, with
a corresponding credit to UK corporation tax.
At 30 June 2019 and 30 June 2018 there were no temporary differences associated with undistributed earnings of subsidiaries for which deferred tax
liabilities have been recognised. No liability would be recognised in respect of these differences because the Group is in a position to control the timing of
the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future.
As set out in Footnote 4 of Note 4, a net deferred tax asset of £2.2m (EUR 2.5m) which primarily comprised historical accumulated losses in Germany was
derecognised in the prior year. The deferred tax asset not recognised in respect of losses incurred in Germany as at 30 June 2019 amounts to £10.9m
(EUR 12.2m) (2018: £10.7m (EUR 12.2m)).
A deferred tax asset continues to be recognised in the United States as at 30 June 2019 in respect of historic research and development claims ('R&D credits')
that can be utilised against future taxable profits. These R&D credits carry a 20-year statute of limitation and must be utilised within that period. The carrying
value of the R&D credits recognised at 30 June 2019 is £4.9m (USD 6.3m) (2018: £5.5m (USD 7.2m)).
The Directors have performed an assessment and consider that it is probable that future taxable profits will be available in the United States against which
the carrying value of the recognised deferred tax asset can be utilised in the foreseeable future. This assessment was based on a review of the projected
annual profit before tax of the consolidated tax group in the United States, based upon the latest Board-approved budgets and business plans for the next
three years, together with long-term growth assumptions based on prevailing inflation and economic growth rates. Based on the ‘base case’ assumptions,
the entire deferred tax asset is forecast to be predominantly utilised by 30 June 2022, with each individual R&D credit being utilised in no less than three
years before the expiry of its 20-year statute of limitation period. The assessment was subject to reverse-stress testing, the results of which did not change
management’s view of the recoverability of the asset.
Company
At 1 July 2017
Charged to the income statement
Charged to other comprehensive income
Credited directly to equity
At 30 June 2018
Charged to the income statement
Credited to other comprehensive income
At 30 June 2019
Accelerated
capital
allowances
£m
Defined
benefit
obligation
£m
Tax
losses and
credits
£m
Unrealised
capital
gains
£m
-
(0.1)
-
-
(0.1)
-
-
(0.1)
4.1
(0.7)
(2.7)
-
0.7
(0.7)
1.4
1.4
0.2
-
-
-
0.2
-
-
0.2
(0.5)
-
-
-
(0.5)
-
-
(0.5)
Other
£m
0.9
(0.2)
-
0.1
0.8
(0.2)
-
0.6
Total
£m
4.7
(1.0)
(2.7)
0.1
1.1
(0.9)
1.4
1.6
Creating a world fit for the future 161
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Notes to the financial statements
26 Provisions
Group
At 1 July 2017
Arising on acquisition (Note 12(b))
Charged to the income statement
Utilised in the year
Released in the year
At 30 June 2018
Charged to the income statement
Utilised in the year
Released in the year
At 30 June 2019
Warranty
£m
Restructuring
costs
£m
Employment-
related
benefits
£m
1.6
-
1.5
(0.8)
(0.3)
2.0
1.8
(0.6)
(0.3)
2.9
0.1
-
2.4
(0.1)
-
2.4
0.2
(1.3)
(0.1)
1.2
0.5
-
0.6
-
(0.1)
1.0
0.4
-
-
1.4
Other
£m
0.4
0.4
-
(0.4)
(0.1)
0.3
0.1
-
-
0.4
Total
£m
2.6
0.4
4.5
(1.3)
(0.5)
5.7
2.5
(1.9)
(0.4)
5.9
The warranty provision reflects the Directors' best estimate of the cost required to fulfil the Group's assurance-type warranty obligations within a number of
contracts. Subsequent to their initial recognition, warranty provisions are utilised or released over the periods of the various warranty obligations, which are
expected to be less than five years.
The provision for restructuring costs included amounts payable to former employees who have been made redundant, primarily as part of the
reorganisation of our Automotive businesses within Technical Consulting, as set out in further detail in Note 4. The element of the provision relating to
redundancy costs was partially utilised during the year with the remaining balance expected to be utilised in less than one year. Provisions for onerous lease
obligations are also included which will be utilised over the duration of the lease, predominantly expected to be over the next five years.
Employment-related benefits are statutory provisions which include long-service awards and termination indemnity schemes. The timing of the cash
outflows is dependent upon the retirement or attrition of employees, but is predominantly expected to be more than five years.
Other provisions comprise expected costs of legal claims and litigation, together with dilapidation and restoration costs for leasehold property. The
associated cash outflows for legal claims and litigation are predominantly expected to be less than one year. Dilapidation and restoration costs reflects
the Directors' best estimate of future obligations relating to the maintenance and restoration of leasehold properties arising from past contractual
commitments to new, extended or terminated lease agreements. The timing of the cash outflows are dependent upon the remaining term of the
associated leases and are subject to negotiation.
Group
Current
Non-current
At 30 June
The Company has a provision within current liabilities for expected costs of legal claims and litigation of £0.1m (2018: £Nil).
27 Share capital
Group and Company
Allotted, called-up and fully paid ordinary shares of 25p each:
At 1 July
Allotted under share option schemes
Allotted under the LTIP scheme
Allotted under the DBP scheme
Unallocated shares remaining in EBT
At 30 June
2019
Number
2018
Number
53,406,250
-
-
-
-
53,406,250
53,163,423
2,827
136,140
69,834
34,026
53,406,250
2019
£m
2.2
3.7
5.9
2019
£m
13.4
-
-
-
-
13.4
2018
£m
2.8
2.9
5.7
2018
£m
13.3
-
0.1
-
-
13.4
The consideration received for shares allotted under the share option schemes, Long-Term Incentive Plan ('LTIP') and Deferred Share Bonus Plan ('DBP')
during the year ended 30 June 2019 was £Nil (2018: £0.1m).
No dividends were paid for interim and final dividends in respect of shares held by an Employee Benefit Trust ('EBT') in relation to the LTIP. There were 40,631
such shares at 30 June 2019 (2018: 36,839 shares).
28 Share premium
Group and Company
At 1 July 2017, 30 June 2018 and 30 June 2019
£m
14.3
162 Ricardo plc Annual Report & Accounts 2018/19
Group
At 1 July 2017
Arising on acquisition (Note 12(b))
Charged to the income statement
Utilised in the year
Released in the year
At 30 June 2018
Utilised in the year
Released in the year
At 30 June 2019
Charged to the income statement
Warranty
Restructuring
costs
Employment-
related
benefits
Other
Total
£m
1.6
-
1.5
(0.8)
(0.3)
2.0
1.8
(0.6)
(0.3)
2.9
£m
0.1
-
2.4
(0.1)
-
2.4
0.2
(1.3)
(0.1)
1.2
£m
0.5
0.6
-
-
(0.1)
1.0
0.4
-
-
1.4
£m
0.4
0.4
-
(0.4)
(0.1)
0.3
0.1
-
-
0.4
£m
2.6
0.4
4.5
(1.3)
(0.5)
5.7
2.5
(1.9)
(0.4)
5.9
Notes to the financial statements
29 Share-based payments
The Group operates the following share-based payment schemes: an equity-settled Executive Share Option Plan (the '2004 Plan'); an equity-settled and a
cash-settled Long-Term Incentive Plan ('LTIP'); a Deferred Share Bonus Plan ('DBP') and an equity-settled all-employee Share Incentive Plan ('SIP').
The general terms and conditions, including vesting requirements and performance conditions for the 2004 Plan, the equity-settled LTIP, the DBP and the
equity-settled SIP are described in the Directors' Remuneration Report.
The 2004 Plan, LTIP, DBP and SIP require shareholder approval for the issue of shares. There were no awards outstanding in relation to the SIP at the year-end.
50% of awards granted under the LTIP and DBP Matching Awards are dependent on a Total Shareholder Return (‘TSR’) performance condition. As relative
TSR is defined as a market condition under IFRS 2 Share-based Payment, this requires the valuation model used to take into account the anticipated
performance outcome. The TSR element of the charge to the income statement has been calculated using the Monte Carlo model and the earnings per
share ('EPS') element has been calculated using the Black Scholes model. The following assumptions are used for the plan cycles commencing in these
years:
Weighted average share price at date of award
Expected volatility
Expected life
Risk-free rate
Dividend yield
Possibility of ceasing employment before vesting
Weighted average fair value per LTIP as a percentage of a share at date of award
2019
720p
27.0%
3 yrs
0.8%
2.8%
10.0%
72.2%
2018
860p
24.4%
3 yrs
0.5%
2.2%
10.0%
77.0%
Expected volatility was determined by calculating the historical volatility of the Company's share price over the three financial years preceding the date of
award.
The share-based payments charge of £1.0m (2018: £1.0m) disclosed in Note 7 was all in respect of equity-settled schemes.
Equity-settled Executive Share Option Plan
Outstanding
At 1 July
Exercised
At 30 June
2019
Weighted
average share
price
-
-
-
Number
-
-
-
2018
Weighted
average share
price
305p
305p
-
Number
2,827
(2,827)
-
There were no outstanding options remaining at the end of the current or prior year.
Equity-settled Long-Term Incentive Plan
The current LTIP is described in the Directors' Remuneration Report. Awards are forfeited if the employee leaves the Group before the awards vest, unless
they are considered 'good leavers'.
Outstanding
At 1 July
Awarded
Lapsed
Vested
At 30 June
(1) Shares allocated excludes dividend roll-up.
2019
Shares allocated(1)
2018
Shares allocated(1)
568,602
247,187
(180,640)
(69,671)
565,478
595,759
213,230
(104,247)
(136,140)
568,602
The outstanding LTIP awards had a weighted average contractual life of 1.4 years (2018: 1.4 years). The weighted average exercise price in both 2019 and
2018 was £Nil.
During the year, the Group cash purchased shares in order to settle vested awards.
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Creating a world fit for the future 163
Notes to the financial statements
29 Share-based payments (continued)
Cash-settled Long-Term Incentive Plan
The cash-settled LTIP has the same performance conditions as the equity-settled LTIP but the award is settled in cash rather than by share issue.
Outstanding
At 1 July
Awarded
Forfeited
Vested
At 30 June
(1) Shares allocated excludes dividend roll-up.
2019
Shares
allocated(1)
2018
Shares
allocated(1)
10,759
3,000
(3,184)
(2,575)
8,000
10,759
-
-
-
10,759
The outstanding LTIP awards had a weighted average contractual life of 1.2 years (2018: 0.9 years). The weighted average exercise price in both 2019 and
2018 was £Nil.
During the year, the Group cash purchased shares in order to settle vested awards.
Deferred Share Bonus Plan
The Deferred Share Bonus Plan is described in the Directors’ Remuneration Report.
Outstanding
At 1 July
Awarded
Forfeited
Dividend shares awarded in the year
Vested
At 30 June
2019
Number of
deferred
shares
2018
Number of
deferred
shares
154,250
96,297
(28,975)
3,029
(54,727)
169,874
230,471
-
(9,228)
2,841
(69,834)
154,250
The outstanding DBP awards had a weighted average contractual life of 1.2 years (2018: 0.8 years). The weighted average exercise price in both 2019 and
2018 was £Nil.
During the year, the Group cash purchased shares in order to settle vested awards.
30 Other reserves
Group
At 1 July 2017
Exchange rate adjustments
At 30 June 2018
Exchange rate adjustments
At 30 June 2019
Merger
reserve
£m
Translation
reserve
£m
1.0
-
1.0
-
1.0
14.6
0.1
14.7
1.2
15.9
Total
£m
15.6
0.1
15.7
1.2
16.9
The merger reserve represents the amount by which the fair value of the shares issued as consideration for historic acquisitions exceeded their
nominal value, offset by the goodwill on these acquisitions.
The translation reserve comprises cumulative foreign exchange differences arising from the translation of financial statements of foreign operations
on consolidation.
164 Ricardo plc Annual Report & Accounts 2018/19
31 Retained earnings
At 30 June 2017 (previously reported)
Adjustment on retrospective application of IFRS 15 (net of tax)(1)
At 1 July 2017 (restated)
Profit for the year (restated)(1)
Remeasurements of the defined benefit pension scheme
Deferred tax on remeasurements of the defined benefit pension scheme
Dividends paid
Equity-settled transactions
Tax credit on equity-settled transactions
At 30 June 2018 (restated)
Adjustment on initial application of IFRS 9 (net of tax)(1)
At 1 July 2018 (adjusted)
Profit for the year
Remeasurements of the defined benefit pension scheme
Deferred tax on remeasurements of the defined benefit pension scheme
Fair value gains on foreign currency cash flow hedges
Dividends paid
Purchases of own shares to settle awards
Equity-settled transactions
At 30 June 2019
Notes to the financial statements
Group
Restated(1)
£m
112.2
(4.5)
107.7
17.6
13.8
(2.7)
(10.5)
1.0
0.1
127.0
(2.7)
124.3
19.8
(7.9)
1.4
0.1
(11.0)
(0.9)
1.0
126.8
Company
£m
79.6
-
79.6
0.2
13.8
(2.7)
(10.5)
1.0
0.1
81.5
-
81.5
10.7
(7.9)
1.4
0.1
(11.0)
(0.9)
1.0
74.9
(1) See Note 38(a) for details of the restatements arising from the retrospective application of IFRS 15 Revenue from Contracts with Customers and Note 38(b) for details of the adjustments arising from
the initial application of IFRS 9 Financial Instruments. The Group has applied IFRS 15 and IFRS 9 as at 1 July 2018. Under the respective transition methods chosen, comparative information is restated for
IFRS 15 as at 1 July 2017, but not for IFRS 9.
32 Cash generated from/(used in) operations
Profit before tax
Adjustments for:
Share-based payments
Fair value (gains)/losses on derivative financial instruments
Profit on disposal of property, plant and equipment
Dividends received from subsidiaries
Net finance costs/(income)
Depreciation and amortisation
Operating cash flows before movements in working capital
(Increase)/decrease in inventories
(Increase)/decrease in trade, contract and other receivables
Decrease in net intercompany receivables
(Decrease)/increase in trade, contract and other payables
Increase in provisions
Defined benefit pension scheme payments
Cash generated from/(used in) operations
Note
29
22
5
8
14 & 15
Group
2018
Restated(1)
£m
27.0
1.0
1.1
(1.6)
-
2.2
15.9
45.6
0.6
4.9
-
(5.6)
3.1
(4.4)
44.2
2019
£m
26.5
1.0
(0.8)
(0.7)
-
2.6
15.4
44.0
(1.2)
(5.2)
-
(1.1)
0.2
(4.3)
32.4
Company
2019
2018
£m
11.2
1.0
(0.8)
-
(11.8)
(1.4)
1.2
(0.6)
-
(1.3)
5.2
0.4
0.1
(4.3)
(0.5)
£m
0.7
1.0
1.1
-
-
0.5
1.4
4.7
-
(0.7)
22.5
(2.5)
-
(4.4)
19.6
(1) The prior year has been restated for IFRS 15 Revenue from Contracts with Customers. See Note 38(a) for more details.
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Creating a world fit for the future 165
Notes to the financial statements
33 Net debt
Net debt is defined by the Group as net cash and cash equivalents less borrowings. Net cash and cash equivalents is defined by the Group as cash and cash
equivalents less bank overdrafts.
Group
Company
Analysis of net debt
Current assets – cash and cash equivalents:
- Cash and cash equivalents
Total
Current liabilities – borrowings:
- Bank overdrafts repayable on demand
- Finance lease liabilities maturing within one year
- Other loans maturing within one year
Total
Non-current liabilities – borrowings:
- Finance lease liabilities maturing after one year
- Bank loans maturing after one year
Total
At 30 June
Movement in net debt
At beginning of the year
Increase/(decrease) in net cash and cash equivalents
Proceeds from finance leases
Proceeds from borrowings
Repayments of borrowings
At 30 June
2019
£m
36.3
36.3
(3.9)
(0.1)
-
(4.0)
(0.6)
(79.1)
(79.7)
(47.4)
2019
£m
(26.1)
8.6
(0.7)
(64.0)
34.8
(47.4)
Group
2018
£m
33.1
33.1
(9.3)
-
(0.1)
(9.4)
-
(49.8)
(49.8)
(26.1)
2018
£m
(37.9)
1.8
-
(15.0)
25.0
(26.1)
2019
£m
1.7
1.7
(0.1)
-
-
(0.1)
-
(14.1)
(14.1)
(12.5)
Company
2019
£m
(15.1)
9.8
-
(42.0)
34.8
(12.5)
34 Operating lease commitments
Future aggregate undiscounted minimum lease payments under non-cancellable operating leases are as follows:
By due date of commitments
Within one year
Between one and five years
After five years
At 30 June
By nature of commitments
Land and buildings
Other
At 30 June
Group
Company
2019
£m
8.6
22.8
29.8
61.2
2019
£m
60.3
0.9
61.2
2018
£m
8.7
24.8
30.8
64.3
2018
£m
63.3
1.0
64.3
2019
£m
0.8
3.2
6.6
10.6
2019
£m
10.6
-
10.6
2018
£m
0.3
0.3
(8.5)
-
(0.1)
(8.6)
-
(6.8)
(6.8)
(15.1)
2018
£m
(24.9)
(3.2)
-
(10.0)
23.0
(15.1)
2018
£m
0.8
3.2
7.4
11.4
2018
£m
11.4
-
11.4
166 Ricardo plc Annual Report & Accounts 2018/19
Notes to the financial statements
35 Contingent liabilities
Group
In the ordinary course of business, the Group has £7.3m (2018: £8.2m) of possible obligations for bonds, guarantees and counter-indemnities placed with
our banking institutions primarily relating to performance under contracts with customers. These possible obligations are contingent on the outcome
of uncertain future events which are considered unlikely to occur. The Group is also involved in commercial disputes and litigation with some customers,
which is also in the normal course of business. Whilst the result of such disputes cannot be predicted with certainty, the ultimate resolution of these
disputes is not expected to have a material effect on the Group’s financial position or results.
In July 2013, a guarantee was provided to the Ricardo Group Pension Fund ('RGPF') of £2.8m in respect of certain contingent liabilities that may arise, which
have been secured on specific land and buildings. The outcome of this matter is not expected to give rise to any material cost to the Group.
In October 2018, a further guarantee was provided to the RGPF for an amount that shall not exceed the employers' liability were a debt to arise under
Section 75 of the Pensions Act 1995. The guarantee will terminate on 5 April 2023. The outcome of this matter is not expected to give rise to any material
cost to the Group on the basis that the Group continues as a going concern.
Company
Contingent liabilities exist in the form of guarantees provided in the ordinary course of business to certain subsidiaries to give assurance of their contractual
and financial commitments. None of these arrangements are expected to give rise to any material cost to the Company.
36 Related party transactions
Transactions between the Company and Group undertakings
Sale of services
Finance income
Finance costs
Year-end balances between the Company and Group undertakings
Amounts owed by Group undertakings (Note 18)
Amounts owed to Group undertakings (Note 20)
2019
£m
17.6
2.0
(1.7)
2019
£m
90.0
(71.1)
2018
£m
16.7
2.4
(1.5)
2018
£m
88.5
(64.4)
All of these transactions with Group undertakings, which are disclosed in Note 37, and with other related parties as disclosed below, occurred on an arm's
length basis.
The Chairman of Ricardo plc, Sir Terry Morgan, was also a statutory director of Crossrail Limited until 5 December 2018, which was deemed to be a related
party that is external to the Ricardo Group up to that date.
Transactions between the Group and Crossrail Limited
Sale of services
Year-end balances between the Group and Crossrail Limited
Trade receivables
The transactions of the Group and Company with the Ricardo Group Pension Fund are disclosed in Note 24.
2019
£m
0.7
2019
£m
-
2018
£m
2.3
2018
£m
0.2
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Creating a world fit for the future 167
Notes to the financial statements
37 Subsidiaries and related undertakings
All subsidiaries and material related undertakings are deemed to be controlled by the Group and are therefore consolidated within these financial
statements. The Company owns, directly(*) or indirectly, 100% of the issued share capital, unless otherwise noted, of the following subsidiaries and related
undertakings as at 30 June 2019:
Subsidiary or related undertaking
Registered office
Principal activities
Ricardo Investments Limited(*)
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Holding Company and
West Sussex, BN43 5FG, United Kingdom†
Management Services
Ricardo UK Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Ricardo Asia Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Ricardo Japan K.K.
18th Floor, Shin Yokohama Square Building, 2-3-12 Shin Yokohama,
Kohoku-ku, Yokohama-shi, Kanagawa, 222-0033, Japan
Ricardo Shanghai Company Limited(*)
Floor 17, Phoenix Building, No. 1515 Gumei Road, Xuhui District,
Shanghai, 200233, PR China
Automotive Consulting, Strategic
Consulting and Performance
Products
Automotive Consulting, Rail
Consulting and Business
Development
Automotive Consulting, Rail
Consulting and Business
Development
Automotive Consulting, Rail
Consulting and Business
Development
Ricardo Prague s.r.o.
Palác Karlín, Thámova 11-13, 186 00 Praha 8, Czech Republic
Automotive Consulting and
Ricardo GmbH
Güglingstraße 66-70, 73529, Schwäbisch Gmünd, Germany
Software
Automotive Consulting and
Business Development
Ricardo Motorcycle Italia s.r.l.
Via Giovanni Pascoli 47, 47853, Cerasolo, Coriano, Rimini, Italy
Automotive Consulting
Ricardo, Inc.
Detroit Technical Center, 40000 Ricardo Drive, Van Buren Township,
Automotive Consulting, Strategic
Detroit, Michigan, 48111-1641, United States
Consulting and Software
Ricardo India Private Limited(*)(1)
6th Floor, M6 Plaza, Jasola District Centre, New Delhi 110076, India
Business Development
Ricardo Strategic Consulting GmbH
4th Floor, Kreuzstraße 16, 80331, Munich, Germany
Strategic Consulting
Ricardo Defense Systems LLC
Detroit Technical Center, 40000 Ricardo Drive, Van Buren Township,
Performance Products
Detroit, Michigan, 48111-1641, United States
Ricardo Defense, Inc.
175 Cremona Drive, Suite 140, Goleta, California, 93117, United States
Defence Consulting
C2D Joint Venture (33.3%)(2)
175 Cremona Drive, Suite 140, Goleta, California, 93117, United States
Defence Consulting
Ricardo-AEA Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Environmental Consulting
West Sussex, BN43 5FG, United Kingdom†
Cascade Consulting
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Environmental Consulting
(Environment & Planning) Limited
West Sussex, BN43 5FG, United Kingdom†
Ricardo South Africa (Pty) Ltd
(formerly PPA Energy (Pty) Ltd)
111 Pretoria Road, Rynfield, Benoni, 1501, South Africa
Environmental Consulting
Ricardo Gulf Technical Consultancy LLC
11th Floor, Office 8, MSMAK Building, Corniche Street, Abu Dhabi,
Environmental Consulting
(49%)(3)
United Arab Emirates
Ricardo Australia Pty Ltd
Level 7, 151 Clarence Street, Sydney, New South Wales, 2000, Australia
Environmental and Rail Consulting
Ricardo Rail Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Rail Consulting
West Sussex, BN43 5FG, United Kingdom†
Ricardo Nederland B.V.
Catharijnesingel 33 J, 3511 GC, Utrecht, Netherlands
Ricardo Rail Australia Pty Ltd
Suite 2.01, Level 2, Tower B, The Zenith, 821 Pacific Highway,
(formerly Transport Engineering Pty Ltd)
Chatswood, New South Wales, 2067, Australia
Ricardo Singapore Pte Limited
141 Middle Road, 5-6 GSM Building, 188976, Singapore
Ricardo (Thailand) Ltd (49%)(4)
388 Exchange Tower Building, 29 Floor, Room 2901-2904,
Sukhumvit Road, Khlong Toei, Bangkok, Thailand
Rail Consulting
Rail Consulting
Rail Consulting
Rail Consulting
Ricardo Hong Kong Limited
Units 3210-18, 32/F Shui On Centre, 6-8 Harbour Road, Wanchai,
Rail Consulting
Hong Kong
Ricardo Technical Consultancy LLC (49%)(5)
Palm Tower, Block B, 15th Floor, P.O. Box 26600, West Bay, Doha, Qatar
Rail Consulting
Chongqing Transportation Railway Safety
Assessment Center Limited (60%)(6)
No. 2 Yangliu Road, Mid Huangshan Street, New North District,
Rail Consulting
Chongqing, 401123, PR China
168 Ricardo plc Annual Report & Accounts 2018/19
Notes to the financial statements
37 Subsidiaries and related undertakings (continued)
Subsidiary or related undertaking
Registered office
Principal activities
Ricardo Beijing Company Limited
Suite 709-710, CCS Mansion, 9 Dongzhimen Nan Street, Beijing,
Independent Assurance
100007, PR China
Ricardo Certification Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Independent Assurance
West Sussex, BN43 5FG, United Kingdom†
Ricardo Certification B.V.
Catharijnesingel 33 J, 3511 GC, Utrecht, Netherlands
Independent Assurance
Ricardo Certification Denmark ApS
Nørre Farimagsgade 11, 1364 Copenhagen K, Copenhagen, Denmark
Independent Assurance
Ricardo Certification Iberia SL
Agustín de Foxá 29, 9th Floor, 28036, Madrid, Spain
Independent Assurance
Ricardo EMEA Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
West Sussex, BN43 5FG, United Kingdom†
Ricardo Software, Inc. (formerly Xogeny, Inc.) Detroit Technical Center, 40000 Ricardo Drive, Van Buren Township,
Dormant
Detroit, Michigan, 48111-1641, United States
Wamarragu Transport Services Pty Ltd
Suite 2.01, Level 2, Tower B, The Zenith, 821 Pacific Highway, Chatswood,
Dormant
(45%)(7)
New South Wales, 2067, Australia
Ricardo Innovations Limited (formerly
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
Cascade Consulting Holdings Limited)
West Sussex, BN43 5FG, United Kingdom†
CDQ Joint Venture (50%)(8)
175 Cremona Drive, Suite 140, Goleta, California, 93117, United States
Dormant
Power Planning Associates Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
West Sussex, BN43 5FG, United Kingdom†
Ricardo Software Limited (formerly Ricardo
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
Russia Limited)
West Sussex, BN43 5FG, United Kingdom†
Ricardo Certificación SL
Avenida Aragon 30, Edificio Europa, 13th Floor, 46021, Valencia, Spain
Dormant
Ricardo Environment Arabia LLC(9)
Bahrain Tower, Building Number 8953, 2393, King Fahd Road, Olaya,
Dormant
12214, Kingdom of Saudi Arabia
Ricardo Strategic Consulting Limited
(formerly Ricardo Vepro Limited)
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
West Sussex, BN43 5FG, United Kingdom†
Ricardo Consulting Engineers Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
West Sussex, BN43 5FG, United Kingdom†
Ricardo Technology Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
West Sussex, BN43 5FG, United Kingdom†
Ricardo Transmissions Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
West Sussex, BN43 5FG, United Kingdom†
Ricardo Pension Scheme (Trustees) Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
West Sussex, BN43 5FG, United Kingdom†
Ricardo Real Estate LLC
40600 Ann Arbor Road East, Suite 201, Plymouth, Michigan, 48170,
Dormant
United States
Ricardo US Holdings, Inc.
40600 Ann Arbor Road East, Suite 201, Plymouth, Michigan, 48170,
Dormant
United States
Ricardo Deutschland GmbH
Güglingstraße 66-70, 73529, Schwäbisch Gmünd, Germany
Liquidation
Nanjing Delta Win Transportation Technical
Room 1101, No. 301, Zhongmen Street, Gulou District, Nanjing, Jiangsu
Liquidation
Services Limited (65%)(10)
Province, PR China
† Registered in England and Wales.
(1) 99% owned by Ricardo plc; 1% owned by Ricardo UK Limited.
(2) 33.3% owned by Ricardo Defense, Inc.; 33.3% owned by DG Technologies; 33.3% owned by Claxton Logistics Services LLC.
(3) 49% of share capital and 80% of retained earnings owned by Ricardo Rail Limited; 51% of share capital and 20% of retained earnings owned by SSD Commercial Investment
(4) 49% of share capital and 92.5% of retained earnings owned by Ricardo Hong Kong Limited; 51% of share capital and 7.5% of retained earning owned by First Asia Industries Limited.
(5) 49% of share capital and 97% of retained earnings owned by Ricardo Rail Limited; 51% of share capital and 3% of retained earnings owned by Pro-Partnership LLC.
(6) 60% owned by Ricardo Beijing Company Limited; 40% owned by Chongqing Science & Technology Testing Center Limited.
(7) 45% owned by Ricardo Rail Australia Pty Ltd; 55% owned by Justin Brooker Nominees Pty Ltd. This associate undertaking is immaterial to the Group.
(8) 50% owned by Ricardo Defense, Inc.; 50% owned by DG Technologies.
(9) 15% owned by Ricardo plc; 85% owned by Ricardo-AEA Limited.
(10) 40% owned by Ricardo Beijing Company Limited; 25% owned by Ricardo Hong Kong Limited; 35% owned by Jiangsu Urban Mass Transit Research & Design Institute Company Limited.
In the opinion of the Directors, the comprehensive income for the year and equity at the reporting date which is attributable to non-controlling interests is
not considered to be material. Non-controlling interests are set out above in Footnotes (2) to (8), and (10).
Creating a world fit for the future 169
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Notes to the financial statements
38 Changes in significant accounting policies
(a) IFRS 15 Revenue from Contracts with Customers
Accounting policy
The Group's accounting policy for revenue recognition as of 1 July 2018, and retrospectively applied to the year ended 30 June 2018, under IFRS 15 Revenue
from Contracts with Customers is disclosed in Note 1(e).
Restatement of comparative financial statements
Consolidated income statement and statement of comprehensive income (extract)
for the year ended 30 June 2018
Revenue
Gross profit(3)
Operating profit:
- Underlying
- Total
Profit before taxation:
- Underlying
- Total
Taxation:
- Underlying
- Total
Profit for the year:
- Underlying
- Total
Profit for the year attributable to owners of the parent:
- Underlying
- Total
Total comprehensive income for the year attributable to:
- Owners of the parent
Performance obligations
Previously
reported
£m
Distinct –
separation(1)
£m
Indistinct –
combination(2)
£m
380.0
138.9
41.2
30.7
39.0
28.5
(8.3)
(9.6)
30.7
18.9
30.6
18.8
30.0
(0.3)
(0.3)
(0.3)
(0.3)
(0.3)
(0.3)
0.1
0.1
(0.2)
(0.2)
(0.2)
(0.2)
(0.2)
(1.2)
(1.2)
(1.2)
(1.2)
(1.2)
(1.2)
0.2
0.2
(1.0)
(1.0)
(1.0)
(1.0)
(1.0)
Restated
£m
378.5
137.4
39.7
29.2
37.5
27.0
(8.0)
(9.3)
29.5
17.7
29.4
17.6
28.8
Earnings per ordinary share attributable to owners of the parent during the year:
- Basic
- Diluted
35.2p
35.1p
(0.4)p
(0.4)p
(1.8)p
(1.9)p
33.0p
32.8p
170 Ricardo plc Annual Report & Accounts 2018/19
Notes to the financial statements
38 Changes in significant accounting policies (continued)
(a) IFRS 15 Revenue from Contracts with Customers (continued)
Consolidated statement of financial position (extract)
as at 30 June 2018
Transition on 1 July 2017
Performance obligations
Year ended 30 June 2018
Performance obligations
Previously
reported
£m
Distinct –
separation(1)
£m
Indistinct –
combination(2)
£m
Distinct –
separation(1)
£m
Indistinct –
combination(2)
£m
Restated
£m
7.6
150.1
141.8
189.6
339.7
(82.5)
(102.0)
87.6
176.5
132.7
176.1
176.5
0.4
0.4
(2.0)
(2.0)
(1.6)
(0.3)
(0.3)
(2.3)
(1.9)
(1.9)
(1.9)
(1.9)
0.6
0.6
(2.5)
(2.5)
(1.9)
(0.7)
(0.7)
(3.2)
(2.6)
(2.6)
(2.6)
(2.6)
0.1
0.1
(0.4)
(0.4)
(0.3)
0.1
0.1
(0.3)
(0.2)
(0.2)
(0.2)
(0.2)
0.2
0.2
(1.6)
(1.6)
(1.4)
0.4
0.4
(1.2)
(1.0)
(1.0)
(1.0)
(1.0)
8.9
151.4
135.3
183.1
334.5
(83.0)
(102.5)
80.6
170.8
127.0
170.4
170.8
Performance obligations
Previously
reported
£m
Distinct –
separation(1)
£m
Indistinct –
combination(2)
£m
28.5
47.1
2.9
(5.1)
44.2
(0.3)
(0.3)
0.4
(0.1)
-
(1.2)
(1.2)
1.6
(0.4)
-
Restated
£m
27.0
45.6
4.9
(5.6)
44.2
Assets
Non-current assets
Deferred tax assets
Current assets
Trade, contract and other receivables(4)
Total assets
Liabilities
Current liabilities
Trade, contract and other payables(4)
Net current assets
Net assets
Equity
Retained earnings
Equity attributable to owners of the parent
Total equity
Consolidated statement of cash flows (extract)
for the year ended 30 June 2018
Profit before tax
Operating cash flows before movements in working capital
Decrease in trade, contract and other receivables
Decrease in trade, contract and other payables
Cash generated from/(used in) operations
(1) Separation of distinct performance obligations
The Group previously recognised revenue over time on certain Technical Consulting contracts for a similar programme of annual services to be performed over a number of years. The total
programme of services for the duration of each contract were proposed as a package and were not subject to separate negotiation. Under IFRS 15, these annual services are deemed to be separate
performance obligations that are distinct from one another within the context of the contract. Revenue continues to be recognised on a percentage of completion basis but based upon these
separate and distinct performance obligations.
(2) Combination of indistinct performance obligations
On a number of Technical Consulting contracts, revenue was recognised separately for services such as sales commission and up-front fees to compensate for costs incurred in obtaining and setting
up a contract or other administrative costs. Under IFRS 15, these activities are not deemed to be costs of the contract as they do not depict the transfer of services to a customer and therefore do not
satisfy distinct performance obligations in the contract upon which revenue can be recognised separately. Revenue is recognised over time and measured through the consistent use of a reliable input
method based on total contract costs incurred to date as a percentage of total estimated contract costs to satisfy each distinct performance obligation.
(3) In addition and separately from the impact of IFRS 15, restated gross profit has been represented on the income statement on page 124 to reclassify certain indirect payroll expenses (£4.5m) and
depreciation charges (£0.8m) from cost of sales to administrative expenses in a manner that is consistent with their classification in the current year.
(4) The cumulative impact of IFRS 15 on contract assets and liabilities results in a reinstatement of those amounts into the order book as at 30 June 2018, to be recognised as revenue in future periods.
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Creating a world fit for the future 171
Notes to the financial statements
38 Changes in significant accounting policies (continued)
(b) IFRS 9 Financial Instruments
Accounting policy
The Group's accounting policy for financial instruments as of 1 July 2018 under IFRS 9 Financial Instruments is disclosed in Note 1(u), including the changes
from the Group's accounting policy for financial instruments under IAS 39 Financial Instruments: Recognition and Measurement, which was disclosed in full in
Note 1(u) to the financial statements in the Annual Report & Accounts 2018.
Impairment of financial assets
The provision for impairment of trade receivables as at 30 June 2018 reconciles to the opening impairment provision on 1 July 2018 as follows:
Provision for impairment of trade receivables
At 30 June 2018 – under IAS 39
IFRS 9 transitional adjustment
At 1 July 2018 – under IFRS 9
Adjustment to retained earnings
IFRS 9 transitional adjustment
Deferred tax impact on transition
At 1 July 2018 – under IFRS 9
£m
1.1
2.4
3.5
£m
2.4
0.3
2.7
The provision for impairment under IFRS 9 was £2.8m as at 30 June 2019 (see Note 18). The provision for impairment under IAS 39 would have been £1.0m as
at 30 June 2019
Adjustment to financial statements
Consolidated statement of financial position (extract)
as at 1 July 2018
Adjusted
under IFRS 15
£m
IFRS 9
transitional
adjustment
£m
Adjusted
under IFRS 9
and IFRS 15(1)
£m
8.9
151.4
135.3
183.1
334.5
80.6
(3.9)
(61.2)
170.8
127.0
170.4
170.8
0.2
0.2
(2.4)
(2.4)
(2.2)
(2.4)
(0.5)
(0.5)
(2.7)
(2.7)
(2.7)
(2.7)
9.1
151.6
132.9
180.7
332.3
78.2
(4.4)
(61.7)
168.1
124.3
167.7
168.1
Assets
Non-current assets
Deferred tax assets
Current assets
Trade, contract and other receivables
Total assets
Net current assets
Liabilities
Non-current liabilities
Deferred tax liabilities
Net assets
Equity
Retained earnings
Equity attributable to owners of the parent
Total equity
(1) Under the modified retrospective transition method, comparative information is not restated for IFRS 9.
172 Ricardo plc Annual Report & Accounts 2018/19
Notes to the financial statements
39 Events after the reporting date
(a) Acquisitions after the reporting date – PLC Consulting
On 31 July 2019, the Group acquired the entire issued share capital of PLC Consulting Pty Ltd (‘PLC Consulting’) for initial cash consideration of £3.9m
(AUD 7.0m) subject to any adjustment to reflect normalised levels of working capital.
PLC Consulting is an Australian firm with a strong technical advisory capability across the project life cycle in infrastructure, environment and planning,
including supporting the environmental requirements of master-planning, business cases, procurement, design, construction and operation.
PLC Consulting was renamed Ricardo Energy Environment and Planning Australia on 5 August 2019.
The following tables set out the provisional fair value of cash consideration payable to acquire PLC Consulting, together with the provisional assessment of
the fair value of net assets acquired.
Provisional cash consideration
Initial cash consideration
Provisional assessment of the fair value of identifiable net assets acquired
Customer contracts and relationships
Trade, contract and other receivables
Cash and cash equivalents
Trade, contract and other payables
Deferred tax liabilities
Total provisional assessment of the fair value of identifiable net assets acquired
Goodwill
Total provisional cash consideration
£m
3.9
£m
1.4
0.6
0.4
(0.1)
(0.4)
1.9
2.0
3.9
All of the initial cash consideration of £3.9m (AUD 7.0m) was paid after the year-end in July 2019. The acquisition was completed on a cash-free and debt-free
basis, subject to normal levels of working capital.
The maximum contingent cash payable is £5.4m (AUD 9.6m). The amounts payable will be based on the achievement of a range of annual performance
targets measured against the earnings before interest, tax, depreciation and amortisation of PLC Consulting across a two year earn-out period. These
payments are dependent upon the continuing employment of the sellers in the business and are not considered to be consideration. The expected
amounts payable will be accrued within specific adjusting items on a pro rata basis.
Provisional adjustments have been made for the recognition of customer-related intangible assets separable from goodwill amounting to £1.4m
(AUD 2.4m), but have not yet been made to other identifiable net assets acquired to reflect their fair value. The provisional assessment of net assets acquired
is based upon available financial information and may be adjusted in future in accordance with the requirements of IFRS 3 Business Combinations and the
sale and purchase agreement.
The provisional assessment of goodwill arising on acquisition can be ascribed to the existence of a skilled, active workforce, developed expertise and
processes and the opportunities to obtain new contracts and develop the business. None of these meet the criteria for recognition as intangible assets
separable from goodwill. None of the goodwill recognised on consolidation is expected to be deductible for tax purposes.
The provisional assessment of net assets acquired of £1.9m (AUD 3.4m) includes trade receivables of £0.6m (AUD 1.1m), all of which is expected to be
collectible.
Acquisition-related expenditure of £0.2m has been charged to the income statement for the year ended 30 June 2019 and is included as a specific adjusting
item in Note 4.
(b) Purchase of Detroit Technical Center
On 21 August 2019, the Group purchased the freehold property of its Detroit Technical Center (‘DTC’), located at 40000 Ricardo Drive, Van Buren Township,
Detroit, Michigan, 48111-1641, United States, for £14.2m (USD 17.3m). The purchase of the facility removes the Group from its long-term lease commitment to
October 2037 and the purchase price was predicated on its tenancy. During the year the Group commenced a process to market the DTC test assets for sale
and the newly acquired freehold property will form part of this process.
These activities provide the flexibility to realign the cost base of the Automotive US business with its strategy as a more operationally efficient consultancy.
The freehold property will be assessed for impairment as part of being classified as held for sale and any charge will be classified as a specific adjusting item
due to the non-recurring nature of the transaction.
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Creating a world fit for the future 173
Additional
information
174 Ricardo plc Annual Report & Accounts 2018/19
Air Quality and
Climate Change
Connectivity and
Intelligent Devices
Energy Security
and Sustainability
Global
Stability
Natural Resource
Scarcity
176 Corporate information
177 Global emissions legislation
Creating a world fit for the future 175
Rapid
Urbanisation
Corporate information
Principal bankers
Lloyds Bank plc
55 Corn Street
Bristol
BS99 7LE
HSBC Bank plc
Global House
High Street
Crawley
West Sussex
RH10 1DL
Group General Counsel
and Company Secretary
Patricia Ryan
Registered office
Ricardo plc
Shoreham Technical Centre
Shoreham-by-Sea
West Sussex
BN43 5FG
Registered company
number
222915
Registrars
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Independent auditors
KPMG LLP
15 Canada Square
London
E14 5GL
Website: www.ricardo.com
A PDF version of this Annual Report & Accounts can be
downloaded from the Investors page of our website.
Key dates
Final dividend record date
Annual General Meeting
Final dividend payment date
8 November 2019
14 November 2019
21 November 2019
Shareholder services
Link Asset Services provide a share portal service, which allows
shareholders to access a variety of services online, including
viewing shareholdings, buying and selling shares online,
registering change of address details and bank mandates
to have dividends paid directly into your bank account. Any
shareholder who wishes to register with Link Asset Services to
take advantage of this service should visit
www.linkassetservices.com/shareholders.
Shareholder enquiries
Tel: 0870 162 3131 (from the UK)
Tel: +44 208 639 3131 (from outside the UK)
Stockbrokers
Investec Investment Banking
2 Gresham Street
London
EC2V 7QP
Tel: 0207 597 5000
Financial advisors
NM Rothschild & Sons
New Court
St Swithin’s Lane
London
EC4P 4DU
Liberum Capital Limited
Ropemaker Place
25 Ropemaker Street
London
EC2Y 9LY
Tel: 0203 100 2000
This report is printed on Lumi papers produced from responsibly managed forests certified in accordance with the rules
of the FSC® (Forest Stewardship Council®) and is ECF (elemental chlorine free). The producing paper mill and printer of
this report are both certified to ISO 14001 and EMAS (Eco-Management & Audit Scheme) international standards and
IPPC (Integrated Pollution Prevention and Control regulation, minimising negative impacts on the environment).
176 Ricardo plc Annual Report & Accounts 2018/19
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Global emissions legislation
Global tailpipe and CO2 emissions legislation adherence are 'must haves' in the development budget of many of our clients
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2030
Euro 6a
Euro 6b
Euro 6d-TEMP (WLTP & RDE)
Euro 6d - ISC - FCM (new ISC procedure and monitoring of fuel consumption)
Passenger cars: 130 gCO2/km
Passenger cars: 95 gCO2 /km
15% reduction 2021 target
2012-2016 standards
2017-2025 standards - proposed amended standards for 2021-2026
Tier 3
LEV III
LEV III (2017-2025, consistent with original EPA standards)
China 5 (Euro 5)
China 6a (WLTP & RDE)
China 6b (WLTP & RDE)
Phase 4
New LCVs standards
Phase 5 (proposed)
2017 standards
2022 standards
WLTP based standards
RDE method being developed
Bharat Stage VI (Euro 6 equivalent - includes RDE)
2015 standards
Euro 4
2020 standards
2022 LCVs standards
2030 standards (proposed)
Euro 5
Vehicle
Type
Region
2010
Euro 5
Tier 2
LEV II
EU
US (49 States)
California
China
India
Japan
EU
LEV II standards (2009-2016)
China IV (Euro 4)
Phase 2
Phase 3
Bharat Stage IV (Euro 4 equivalent)
Post New Long-Term standards
2010 standards
Euro 3
US (49 States)
California
Tier 2 (Class III); Tier 1 (Classes I and II) - harmonised with California
California Motorcycle limits: Tier 2 Class III); Tier 1 (Classes I and II)
China
India
Japan
EU
US (49 States)
California
China
India
Japan
EU
US
China
India
Japan
EU
US
India
Australia
China III
Bharat Stage III
2010 standards
Euro V
EPA 10
EPA 10
China IV
Bharat Stage IV
China IV (WMTC)
Bharat Stage IV
Bharat Stage VI
Euro 4 based standards (WMTC)
Euro VI
Euro VI E (proposed)
Monitoring and reporting CO2 emissions
15% reduction 2019-2020 emissions
Phase 1 federal standards
Phase 2 (2018-2027) federal standards
Compliance of older vehicles to EPA 10 - optional low NOx limits
Phase 1 federal standards
Phase 2 (2018-2027) federal standards
Phase 1 standards
Phase 2 standards
China V
China VIa
China VIb
Phase 3 standards
Bharat Stage VI
Phase 1 standards
Phase 2 standards
Post New Long-Term standards
2016 standards
Stage IIIB
Tier 4 Interim
Stage II
Stage IV
2015 standards
Tier 4 Final
Stage V
Stage III (Nationwide)
Stage IV (Beijing)
Stage IV Nationwide (revised - proposed)
2025 standards
Bharat Stage III - Tractors and CEV
Bharat Stage IV - Tractors and CEV
Bharat Stage V - Tractors and CEV
2006 Non-road standards
2011 Non-road standards
2014 Non-road standards
Stage IIIA
Stage IIIB
Tier 2
Tier 3
Tier 4 Switch & line locomotives
Stage V (Locomotives and railcars)
Proposed standards under consideration
Code of practice - PM standards
Pollutant Emissions Legislation
Fuel Economy or CO2 Emissions Legislation
Glossary
CEV
CO2
EPA
FCM
ISC
Construction Equipment Vehicles
Carbon dioxide
Environmental Protection Agency (United States)
Fuel consumption monitoring
In-service conformity
Light Commercial Vehicle
Particle mass
Real Driving Emissions
Worldwide harmonized Light vehicles Test Procedure
LCV
PM
RDE
WLTP
WMTC Worldwide Motorcycle Test Cycle
Creating a world fit for the future
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